Tax Tip:  CRA PROJECT -Small Business Deduction

The accounting community across Canada has recently noted a series of correspondence from CRA requesting details of corporate businesses operations in connection with a review of the small business deduction claim for some clients. If a business is determined to be a Personal Services Business (PSB) or a Specified Investment Business (SIB), the small business deduction is denied, and additional taxes are applied. A PSB is often referred to as an “incorporated employee”. Basically, it exists where an individual provides employee-like services through a closely held corporation, rather than providing them directly as an employee. Generally, a corporation earning investment income (interest, real estate rental, royalties, capital gains and dividends) is generating SIB income.

Many of these letters appear directed to corporations in the real estate sector like real estate agents and those earning rental income. It has also been noted that letters have begun to be issued in respect of other sectors as well.

Action Item - In many situations, an appropriate explanation will conclude CRA’s interest in the corporation. If such a CRA inquiry is received, contact us as soon as possible.