Blog: Québec Budget 2016 – Changes to the Small Business Deduction

August 22nd, 2016 déduction pour petite entreprise au Québec

Québec’s 2015 budget introduced changes to the small business deduction (SBD) which, in part, refocused eligibility for the SBD to Canadian controlled private corporations (CCPC) that employ more than three full-time employees in its business throughout the year.  As a result of the proposed amendments, CCPCs that employ three or fewer full-time employees would not be able to access the SBD with respect to taxation years beginning after December 31, 2016.

 

In its 2016 Budget, the Quebec government has made revisions to the above-mentioned “more than three full-time employees” eligibility test.  The “more than three full-time employees” test will be replaced by an eligibility test requiring a minimum number of hours worked during the year.  More specifically, the 2016 budget states that a corporation will be able to claim the SBD if either of the following conditions are met:

  • during the taxation year, its employees worked at least 5,500 hours, or
  • during the previous taxation year, the hours worked by its employees and the employees of the corporations with which it is associated total at least 5,500 (referred to as the “previous year consolidated basis test”).

There are specific rules regarding the minimum number of hours worked such as:

  • In determining the total number of hours for all employees – the maximum number of hours per employee per week cannot exceed 40,
  • The hours worked must be paid at the time the SBD is claimed,
  • The hours worked by a shareholder of the corporation will be counted without regards to whether they are remunerated,
  • The 5,500 hours applying to the current year will be based on a completed taxation year and this threshold will be reduced proportionally in the case of a shorter fiscal period (however, the proportional reduction will not be applied for the “previous year consolidated basis test” mentioned above),
  • In regards to the “previous year consolidated basis test”, the corporation must consider the taxation years ended during the calendar year preceding the year during which the corporation’s taxation year ends.

To prevent a corporation from losing its entire SBD where the number of hours falls slightly below the required threshold, the SBD will be reduced linearly between 5,500 and 5,000 hours, and will be zero at 5,000 hours or less.

Please do not hesitate to contact the tax group if you require additional information or clarification.

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