Small Business Deduction Multiplier

A common tax planning objective is to multiply the Small Business Deduction (“SBD”) in a family held business group. Since the SBD allows the first $500,000 of active business income to benefit from a preferred tax rate of 15.5%, multiple SBD’s can result is a significant income tax saving!

CRA has addressed through the concept of “association” wherein Corporations that are associated for income tax purposes must share the allocation of a single $500,000 SBD. The association rules are very specific and generally require “cross-ownership” in a family situation. However, in an attempt to curb abuses of the system, CRA enacted an “anti-avoidance” provision in subsection 256(2.1) that deems two corporations to be associated if one of the main reasons for their separate existence is to reduce the total income tax payable.

There are few cases dealing with this section since most accountants and lawyers structure clients’ business to comply with the legislation. There was a landmark case in 2009 which has provided guidance even though CRA was unsuccessful. The judge’s decision in Taber Solids Control (1998) Ltd. (Dominion Tax Case 2009TCC527) is important in that it sets out what has to be done to successfully argue that 256(2.1) does not apply.

In the Taber case, a husband and wife reorganized a Company in 1998 such that sales were conducted in one Company and servicing and repair was conducted in another. CRA argued that one of the main reasons for the separate existence of the two corporations was to double the SBD. The Tax Court did not see it that way, concluding that the true reason for rearranging the corporate structure was to protect valuable assets of from possible lawsuits arising from business operations. The reorganization also allowed the Taber children to access tax planning benefits with respect to income splitting from their shareholdings through the family trust (prior to the implementation of the “Kiddie Tax”). The Court then concluded that the small business deduction was not a reason for the separate existence of the corporations, let alone the main reason.

The foregoing is not a substitute for professional advice. Sloan Partners LLP can help ensure that you receive the best income tax planning advice possible. For more information contact us

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