Jeffrey Blucher
Jeffrey Blucher, TEP, Lawyer, McInnes Cooper
Daren Baxter
Daren Baxter, TEP, Lawyer
Carolle Fernando
Carolle Fernando, Lawyer

Federal Budget 2016 proposed to significantly reduce the benefit of and access to the Small Business Deduction. The Small Business Deduction reduces an eligible corporation’s federal tax rate in respect of qualifying income to 10.5%, subject to the $500,000 business limit. Under the current rules, Canadian-controlled private corporations (CCPCs) can, subject to various requirements, claim the Small Business Deduction in respect of income from an active business carried on in Canada and specified partnership income. Budget 2016 cancelled the previously scheduled small business rate reductions and proposed new rules intended to restrict multiplication of the Small Business Deduction. These proposed rules will primarily affect group structures involving professionals, but are so broad that they will also apply in many additional situations where a CCPC provides services of any kind to a private corporation or partnership in which the CCPC or one of its shareholders or a person not dealing with the CCPC or one of its shareholders has an interest.


Budget 2016 cancels the previously scheduled rate reductions that were to reduce the federal small business rate to 9% by 2019. It also restricts the ability of CCPCs to multiply the Small Business Deduction by targeting structures in which a corporation earns income from the provision of services or property to certain partnerships and private corporations.

New “designated member” of a partnership concept. A designated member’s income from the provision of services or property to a partnership is not eligible for the Small Business Deduction, except to the extent that a non-arm’s length member of the partnership assigns its “specified partnership business limit” to the designated member.  A “designated member” is a CCPC that: provides (directly or indirectly, in any manner whatever) services or property to the partnership; is not a member of the partnership; either has a shareholder that holds a direct or indirect interest in the partnership, or doesn’t deal at arm’s length with a person that holds a direct or indirect interest in the partnership; and the CCPC doesn’t derive all or substantially all of its active business income from providing services or property to arm’s length persons or partnerships.

New “specified corporate income” concept. A CCPC’s specified corporate income is not eligible for the Small Business Deduction except the lesser of the amounts a private corporation assigns from its business limit to the CCPC and the amount the Minister determines reasonable in the circumstances. “Specified corporate income” is income of a CCPC from the provision of services or property to a private corporation if the corporation (or a shareholder) or a person not at arm’s length with the corporation (or a shareholder) has a direct or indirect interest in the private corporation, and all or substantially all of the CCPC’s active business income is not from providing services or property to arm’s length persons or partnerships.

New anti-avoidance rule. In a new rule likely affecting the sidecar structure, no part of a corporation’s income from the provision of services or property to a person or partnership (the “recipient”) is eligible for the Small Business Deduction if the recipient has a direct or indirect interest in a partnership or corporation, and one reason for the provision of the services or property to the recipient instead of to the partnership or corporation is to avoid the new rules.

Here are some key impacts of these proposed changes:

Professional Corporations. The changes affect professional corporations that are part of a group structure involving a central partnership or corporation, such as many law firms, dentists, physicians and accounting firms. Before, these professionals could structure to multiply the Small Business Deduction; now, they must generally share one – unless they restructure. The changes don’t generally affect a professional corporation that is not part of a group structure involving a central partnership or corporation (e.g., a sole practitioner with a professional corporation or those engaged in cost-sharing arrangements).

“Services”. The proposed rules are not limited to professionals: they refer to the provision of “services” without qualification. For example, a CCPC that primarily provides services (e.g., construction) to a non-arm’s length private corporation (e.g., a real estate developer) may not be associated with that other private corporation, but they will now share one Small Business Deduction.

No minimum ownership threshold. There is no minimum ownership threshold to trigger the new rules. In this respect, they are very broad and may, for example, apply to many situations where CCPCs providing services or property have a minority share interest in the recipient. For example, a CCPC with a shareholder that has any interest in a partnership or private corporation to which the CCPC provides services or property might be subject to the proposed rules.


Analysis of the proposed changes is ongoing. In the short term, CCPCs should review all existing corporate structures and consider appropriate action. In some cases, eliminating non-essential minority interests or increasing services to arm’s length parties may be helpful. Here are some more possible strategies to deal with the changes:

Maintain existing structures. In limited situations, one Small Business Deduction may be sufficient. In others, deferral and income-splitting opportunities, though more limited, will still exist even where corporate income is taxed at the general corporate rate (that ranges from 27% to 31% in the Atlantic provinces). CCPCs that adopt this strategy should watch for a non-CCPC private corporation as the recipient of services since it can’t assign a business limit, and ensure that any partnership retains some active business income so its partners will have a “specified partnership business limit” to assign.

Convert central partnership/corporation to a cost-sharing arrangement. A partnership is a relationship between two or more persons who carry on business in common with a view to profit. Conversely, in a cost-sharing arrangement, separate profits are earned directly by persons who share certain expenses. Any cost-sharing arrangement should be clearly evidenced in writing to minimize the risk it will be characterized as a partnership.

Change central entity. Use an entity other than a partnership or private corporation as the central entity; alternative entities include a public corporation, trust, society or cooperative.

Use a “Central Facilitator Model”. To retain the non-tax benefits of a central entity, use a Central Facilitator Entity (CFE) in which none of the service corporations, their shareholders or any non-arm’s length persons are shareholders. The CFE facilitates & coordinates services such as the following on a cost-recovery only basis: delivery of services by independent contractors; allocation of business and/or service needs among them; acquisition and use of common resources and/or staff; and common administration.

To discuss this or any other legal issue, contact any member of McInnes Cooper’s Tax Solutions Team. Read more McInnes Cooper Legal Publications and subscribe to receive those relevant to your business.

McInnes Cooper prepared this article for information; it is not legal advice.  Consult McInnes Cooper before acting on it. McInnes Cooper excludes all liability for anything contained in or any use of this article. © McInnes Cooper, 2016.  All rights reserved.

About the authors:

Jeff Blucher leads McInnes Cooper’s Private Client Services group and practices tax, corporate and wills, estates and trusts law. Jeff has significant experience with income tax planning for small and medium-size businesses and estate and business succession planning and with the formation of NS unlimited liability companies. You can reach Jeff at

Daren Baxter TEP is a member of McInnes Cooper’s Private Client Service group focussing on tax and estate planning. A Registered Trust and Estate Practitioner with a particular knowledge of trusts, estate planning and business succession, Daren advises on domestic and cross-border corporate and shareholder tax planning, business expansion, complex corporate reorganizations, CRA disputes, creditor limitation strategies and the design and implementation of tax-effective planning strategies. You can reach Daren at

Carolle Fernando is a member of McInnes Cooper’s Private Client Services group. Carolle advises on and implements domestic reorganizations, sales and acquisitions and has particular expertise advising multinational clients on cross-border tax matters and implementing cross-border reorganizations and acquisitions, and start-ups on cross-border and domestic tax matters. You can reach Carolle at