Quebec’s Small Business Tax Deduction and How It Relates to Payroll Hours

Revenue Quebec, in the March 2017 budget (or the Quebec economic plan as they like to call it) decided that a small business wasn’t a small business for the purposes of the tax deduction, unless a minimum number of payroll hours was worked by employees of the business.   Initially they had wanted to impose a minimum number of 3 full time employees to qualify for the deduction, however, after realizing that many businesses had several part time employees during the year, they changed the requirement to a minimum number of hours worked to 5,500 hours per year.  This could be a combination of full time and part time employees.  Consequently, many businesses that had qualified for the small business tax rate were no longer eligible.

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The Quebec corporate (business) tax rate for regular (non small business) for 2019 is 11.6% which will further decrease to 11.5% in 2020.  This means that if the year end of your corporation falls in the 2019 calendar year, your Quebec corporate business tax rate will be 11.6%.  for example. a corporation with a year end of January 31, 2019 would have a combined business tax rate of 15% federal + 11.6% Quebec equalling 26.6% in 2019. 

Revenue Quebec also reduced the small business tax rate from 8% to 7% in 2018 along with a further annual reduction of 1% starting January 1st, 2019 for the next three years.  In other words, the Quebec small business tax rate is 6% for 2019, 5% in 2020 and 4% in 2021 after which it will remain at this rate assuming the government does not introduce any new measures in subsequent budgets.

As a result of the new Revenue Quebec definitions of a small business for tax purposes,  a business corporation that is a CCPC (Canadian Controlled Private Corporation) with under $500k income will be considered to be a small business from a Revenue Canada (CRA) standpoint for which the Federal CRA small business tax rate is 9%,.  For Quebec purposes, the same business will only qualify for the small business deduction if (in addition to less than $500k of net income):

• The corporation is a CCPC

• Paid up capital is $10 million or less

• Total number of hours worked by employees (including part time employees) is 5,500 hours

  Source

It is important to note:

• that the small business deduction will still be available at a proportionally reduced rate if the number of hours worked by employees is between 5000 and 5,500 hours.  If the number of hours worked is less than 5,000 in a given taxation year as well as the previous taxation year, then the small business deduction is reduced to zero.

• No single employee can work more than 40 hours a week or 2,080 hours per taxation year (fiscal year of the corporation) even though many small business owners put in many more than 40 hours a week. 

• Even if the business owner is not being paid for their work, they may claim 40 hours per week for the year assuming they work full time in their businesses.

• The business owner is anyone who controls most of the voting rights of the shares, directly or indirectly. If these hours are taken into consideration the nature of the work performed should be documented in detail (a job description outlining the owners activities would be helpful)

With respect to the paid-up capital of the corporation, the $500 000 business limit is gradually reduced if the corporation’s paid-up capital and that of the corporations with which it is associated is between $10 million and $15 million. It is eliminated when paid-up capital reaches $15 million

It the business does qualify for the small business deduction, then the combined small business corporate tax rate for 2019 will be federal rate of 9% plus the Quebec rate of 6% = 15%.

If the business does not qualify as a small business in Quebec in the circumstance that the total numbers of hours worked by employees was less than 5,500, the 2019 corporate tax rate will be 9% federal small business rate + Quebec regular business tax rate = 20.6%. 

Although, the calculations are a bit complex, Quebec corporate tax software is programmed to ensure that the rates are computed correctly.

For planning purposes, business should consider increasing (or not shying away from) the number of hours worked by employees in the corporation to take advantage of the small business deduction, particularly when there is an expectation of profit in the business. The tax savings on $100,000 of net income can be about $5,600 which is certainly a good incentive to increase the number of employees hired and give them more hours, particularly when the number of payroll hours worked is close to the 5,500 number. 

Ronika Khanna is an accounting and finance professional who helps small businesses achieve their financial goals. She is the author of several books for small businesses and also provides financial consulting services.

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