What is the SBD?
The SBD reduces the corporate income tax that a corporation would otherwise have to pay in a taxation year throughout which it was a Canadian-controlled private corporation (CCPC). A corporation’s SBD for a taxation year is generally calculated by multiplying its SBD rate by the lesser of its:
- income for the year from an active business carried on in Canada, excluding certain income and exceeding certain losses;
- taxable income for the year; and
- business limit for the year.
How is the business limit determined?
A CCPC’s business limit for a taxation year is $500,000, prorated for the number of days in the year if there are less than 51 weeks in the year. The business limit must be allocated amongst corporations that are associated in a taxation year, and is reduced by any portion that the CCPC assigns to another corporation. The CCPC’s remaining business limit is then further reduced on a straight-line basis if the combined taxable capital employed in Canada of the CCPC and any associated corporations is between $10 million and $15 million (the taxable capital business limit reduction).
What is the proposed change to the SBD rules?
The budget proposes to phase-out a CCPC’s business limit, on a straight-line basis, if the total of the adjusted aggregate investment income of the CCPC and any other corporation with which it is associated is between $50,000 and $150,000 (the passive income business limit reduction).
The reduction in a CCPC’s business limit for a taxation year will be the greater of its taxable capital business limit reduction and its passive income business limit reduction for the year.
How will a CCPC’s passive income business limit reduction be calculated?
A CCPC’s passive income business limit reduction for a particular taxation year will be the amount determined by the formula:
BL/$500,000 x 5 (AAII – $50,000)
where
BL is the CCPC’s business limit otherwise determined for the particular year (i.e., its business limit as described above); and
AAII is the total of all amounts each of which is the adjusted aggregate investment income of the CCPC, or of any corporations with which it is associated at any time in the particular year, for each of their taxation years that ended in the preceding calendar year.
Example 1
ABC Company is a CCPC having a December 31, 2020, taxation year end, and is not associated with any other corporations in the year. ABC Company’s adjusted aggregate investment income for its December 31, 2019, taxation year was $75,000.
ABC Company’s passive income business limit reduction for its 2020 taxation year is determined as follows:
= $500,000/$500,000 x 5($75,000 – $50,000)
= 1 x 5($25,000)
=$125,000
Consequently, ABC Company’s business limit for its December 31, 2020, taxation year will be reduced from $500,000 to $375,000 (i.e., $500,000 – $125,000).
Example 2
Same facts as Example 1 above, except that ABC Company is associated with XYZ Company, which had $55,000 of adjusted aggregate investment income in its December 31, 2019, taxation year. The entire business limit for the 2020 taxation year was allocated to ABC Company.
ABC Company’s passive income business limit reduction for its 2020 taxation year is determined as follows:
= $500,000/$500,000 x 5(($75,000+$55,000) – $50,000)
= 1 x 5($80,000)
=$400,000
Consequently, ABC Company’s business limit for its December 31, 2020, taxation year will be reduced from $500,000 to $100,000 (i.e., $500,000 – $400,000).