More than five employees

National Post


If you operate your small business through a corporation, no doubt you are fully aware of the two main potential tax advantages: a preferential corporate tax rate on the first $500,000 of "active business income" as well as access to the $750,000 lifetime capital-gains exemption, which may be used to shelter from tax some or all of the capital gain on the ultimate sale of your business.

These are significant advantages, so much so that some investors are tempted to transfer their investments into a corporation to take advantage of them. But be aware, the tax rules only grant these advantages to corporations that earn active business income (ABI).

In general, the definition of ABI excludes investment income as well as rental income. But that's not always the case. Corporations that do earn such income, but that are sufficiently active that they employ more than five full- time employees, can still qualify for these tax advantages.

While this phrase "more than five full-time employees" seems ostensibly straightforward, it was the subject of a recent Tax Court decision that directly reverses a long-standing Canada Revenue Agency administrative

policy. The case involved a private company that had five full-time employees and two part-time employees. The issue was whether the company employed "more than five full-time employees." The CRA has always maintained, as articulated in its Interpretation Bulletin, "The Small Business Deduction," that "more than five full-time" means the company must employ at least six full- time individuals. The Court disagreed and concluded that having some part-time employees can put you over the "more than five full-time" test.