Many farmers across Canada can expect to benefit from a change in the small business deduction (SBD) rules. In fact, you may have already noticed your corporate tax bill has gone down this year. This is because the change came into effect starting with corporate year‑ends ending April 30, 2023.

What is the SBD and what has changed?

The small business deduction is essentially a targeted measure that allows small businesses to have a lower corporate tax rate on up to $500,000 of their income annually. This allows them to reinvest more of their profits and pay less tax. One of the cutoff points for eligibility for the SBD is based on taxable capital, which can be summed up as a business’ equity plus a business’ debt. The good news for a great many farmers is the cutoff point has increased from $15 to $50 million.

More farmers now have access to the SBD

Many corporations that were considered too big to access the SBD in the past are now eligible for these tax savings going forward, including many average‑sized farms. The fact is, the “average” Canadian farm has grown in size over the last decade, resulting in many farms outgrowing the old $15 million SBD cutoff. There are a number of reasons for this, including the increased cost of farmland, increases in commodity prices, as well as farms building up more and more assets and acquiring more debts to pay for them. Any or all of these factors may have contributed to a relatively modest farm having taxable capital of more than $15 million, denying them access to the SBD.

Who benefits?

The SBD used to be pro‑rated from $10 million to a maximum of $15 million. Now it is pro‑rated from $10 million to a maximum of $50 million. That means many more farmers with corporations that were considered too big before will qualify for the SBD. It could be a third‑generation farm business which bought land more than 40 years ago when prices were lower and has been accumulating assets ever since, with all its debts paid off. At the other end of the scale, it could be “new” farmers with high debt loads for the size of their operation, simply because they are starting out with assets bought at historically high prices. From dairy farms in the East with high debt from quota, barns and land base to larger cash crop farms out West, the change in the SBD will benefit a wide spectrum of farmers across Canada.

How much can you save?

It depends on the province and the size of the farm, but the tax savings can be substantial. For a $15 million‑sized farm the savings would range from $60,000 in Alberta to $105,000 in PEI. For a larger farm with $30 million in taxable capital, the savings would range from $30,000 to $50,000. For a $45 million farm the pro‑rated savings fade out more but would still range from $7,500 to $10,000.

Target your income level to maximize your savings

If you now have access to the SBD, you should talk to your accountant about how to make the best use of it. This is especially important if you expect to have access to the SBD for a limited time only (if you expect your farm to continue to grow and lose access again in the future), as it will pay you to bump up your income in those years to take advantage of the tax savings available at the lower corporate tax rate.

Remember the associated corporation rules

The associated corporation tax rules prevent businesses from getting around the SBD cutoff limits by dividing their activities between separate corporations. For example, if a farmer has associated corporations, such as a grain elevator operation in addition to the main farm business, the taxable capital is shared between those businesses. The two corporations do not get their own individual taxable capital limit.

Meet the Author

Luther VanGilst
Winchester, Ontario
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