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Taxable Capital

September 20, 2012

Tax Question:

What is taxable capital employed and why is it important for my company?

Facts:

Taxable capital employed in Canada is used to determine if a Canadian Controlled Private Corporation (CCPC) qualifies for the small business deduction (SBD), a reduction in the corporate tax rate.

Discussion:

A company that is a CCPC is eligible to receive a reduced corporate tax rate for active business income under the small business limit, which is currently $500,000. In BC, the reduced tax rate for active business income under this threshold is 13.5%; all active business income exceeding $500,000 is currently subject to a 25% general tax rate.

Taxable capital employed in Canada is a calculation used by the CRA to judge if a CCPC is in fact a small business and eligible to receive the SBD rate of tax. Taxable capital employed is loosely calculated as the company’s retained earnings and share capital; however, it also includes other adjustments such as the addition of all loans and advances to the company, as well as a host of other add-backs and deductions. If taxable capital employed exceeds $10,000,000, the amount of active business income eligible for the small business limit will reduce from the $500,000 threshold and will be eliminated once taxable capital exceeds $15,000,000. For example, if a company has taxable capital employed of $12,500,000 then the amount of the small business limit of active income eligible for the reduced SBD tax rate is only $250,000. Any income in excess of $250,000 is taxed at the higher general tax rate.

Another thing to note is that the taxable capital employed test is applied to groups of associated companies. This means if you own multiple companies, the taxable capital employed for all companies combined cannot exceed $10,000,000, as the small business limit is shared among the associated companies.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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