Chartered Professional Accountants

Proposed Changes to the Small Business Deduction

In the 2016 Federal Budget, new measures have been proposed to limit multiple access to the small business deduction (SBD). One proposed change that will affect a large amount of Canadian control private corporations and structures are SBD restrictions on payments between private corporations. This is important given that income taxed under the SBD is eligible to be taxed at a lower rate.  These changes will come into effect for taxation years starting on or after March 22, 2016. For example, companies with a year end March 31st 2017 onward will be effected by this new proposal.

This new term is coined as “Specified Corporate Income (SCI)” and will restrict access to the SBD on active business income (ABI) earned from providing services/property to another private corporation (PayCo) where there is common ownership, ineligible for the SBD.

ABI is considered income earned from a business source, rather than other sources such as property/investment income that is not incidental to the business. Common ownership is when there is interest in PayCo held by:

  • Corporation providing the service and receiving fees (ServeCo)
  • Any shareholder of ServeCo
  • Any person who is not at arm’s length with shareholders of ServeCo (for example, children, parents, siblings, spouse etc.)

Even a small amount of interest held may trigger these restrictions to apply. For example, if you own a small share in PayCo and your spouse owns a small share in ServeCo, these restrictions could apply. However, the budget has proposed that companies may assign a portion of their unused SBD limit to the other company to keep the SCI eligible for the SBD.

While the proposals may change during finalization into law, there is no doubt that many corporations will be affected by this new change. Please consult us if you believe that this change may affect your business in order to adjust your tax planning accordingly.



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