How to determine which corporations are required to share the same small business limit.
Every CCPC (Canadian Controlled Private Corporation) is allotted a $500,000 small business limit, in which the first 500k of taxable income is taxed at the more favorable small business rate of 11% (in Alberta). Any active business income in excess of this limit is taxed at the general rate of 23% (in Alberta).
One might think that the gateway to multiple small business limits is to open up multiple corporations, however this is not the case, as there are specific rules in the income tax act that deem certain corporations to be associated for the purpose of the small business limit. If two corporations are deemed to be associated, then they must share the same $500,000 small business limit.
Below you will find the common scenarios that deem two corporations to be associated:
- one of the corporations controlled, directly or indirectly the other;
- both of the corporations were controlled by the same person or group of persons;
- each of the corporations was controlled by a person and the person who controlled one of the corporations was related to the person who controlled the other, and either of those persons owned, in respect of each corporation, not less than 25% of of the issued shares of the capital stock;
- one of the corporations was controlled by a person, and that person was related to each member of a group of persons that controlled the other corporation, and that person owned, in respect of that corporation not less than 25% of the issued shares of the capital stock; and
- each of the corporations was controlled by a related group and each member of one of the groups was related to all members of the other related group, and one or more persons who were members of both related groups, either alone or together, owned, in respect of each corporation, not less than 25% of the issued shares of the capital stock.
The rules regarding associated corporations are complex, and require careful planning and attention to detail. Contact us today for a free consultation.
