48 What is a Small Business Corporation? Explain any tax advantages of being a Small Business Corporation.

What is a Small Business Corporation?

According to ITA 248(1) a small business corporation (SBC) is essentially a corporation that is a Canadian Controlled Private Company (CCPC) that has all or substantially all (90% or more) of the fair market value of its assets engaged in:

• Being used to carry on active business (primarily) in Canada or by a related corporation
• Shares or debts of related corporations that used to be small business corporations
• A combination of the two

What is a Qualified Small Business Corporation?

It is important to note that while all Qualified Small Business Corporations (QSBC’s) are SBC’s not all SBC’s are QSBC’s. In order for small business corporation shares to be a QSBC they must satisfy all of the following criteria according to ITA 110.6(1):

• At the time the shares are sold, it was a share of the capital stock of a small business corporation and owned by the taxpayer or their spouse or common-law partner, or a partnership of which the taxpayer is a member.
• For 24 months before the share was sold it remained a share of a CCPC with primarily (50% or more) in active Canadian business and satisfies the requirements of being a Small Business Corporation.
• For 24 months before the share was sold, no one owned the share other than the taxpayer, or member of a partnership

What are the tax implications of being a Small Business Corporation (particularly how does it tie into Business Investment Losses and the Lifetime Capital Gains Exemption)?

Having a business that meets the criteria of a small business corporation can present several desirable tax advantages.

One of the most apparent is the Lifetime Capital Gains Exemption. This permits the sale of shares in an applicable company tax free, for up to $850,000. However, it is important to note that according to ITA 80.03(8) a corporation MUST meet the criteria of a qualified small business corporation in order to receive this exemption.

Another advantage for owners of small business corporation is business investment losses. For example, if an owner sells shares of his small business corporation at a loss (at arm’s length) a business investment loss is created. Half of that loss qualifies as an allowable business investment loss (ABIL). As opposed to an allowable capital loss an ABIL can be deducted against ANY sources of income, for the taxpayer.

Interactive content (Author: Shelley Lavigne, January 2020)

References and Resources:

• ITA 80.03(8), 248(1), 110.6(1)
• “Definitions for capital gains deduction” (Author: Government of Canada)
• “Canada: Qualified Small Business Corporation and Lifetime Capital Gains Exemption” (Author: Mondaq)
• “Income Tax Folio S4-F8-C1, Business Investment Losses” (Author: Government of Canada)