Taxable capital reduction of the business limit

Larger private companies, and buyers adding a target to an existing group, meet this reduction when the small business deduction is calculated. Subsection 125(5.1) lowers the business limit for the year, and the CRA’s T2 guide says the limit is reduced on a straight-line basis once taxable capital employed in Canada passes a threshold. See whether the deduction carries over when you buy a company.

Who is counted

Where a corporation is associated with others, the Act uses the total of the taxable capital employed in Canada of the corporation and each associated corporation, for its last taxation year that ended in the preceding calendar year. The CRA says similar restrictions apply to any CCPC in an associated group whose total is over the threshold, and that very large CCPCs do not qualify for the deduction at all. Subsection 125(5.1) reduces the limit by the greater of this amount and a separate amount in paragraph 125(5.1)(b), which turns on adjusted aggregate investment income.

What to ask

• The taxable capital employed in Canada of the target and every associated corporation, including the buyer’s
• Whether the CRA’s taxable-capital schedules were filed with the return
• How the limit is split in the Schedule 23 agreement