What is taxable capital employed and why is it important for my company?
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.
A company that is a CCPC (see FAQ #13) 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 have questions concerning taxable capital employed and the potential impact to your company, please contact us for our help on this issue.Download a copy of this issue here