The advent of 2008 has brought about a tax break for small business owners in the form of a reduced tax rate on the first $400,000 of income (previously this limit was $300,000). The tax rate on net profits before tax is now reduced to approximately 18.6 per cent.

What exactly does that mean to small business owners?

As previously discussed, the majority of business owners are sole proprietors that have simply registered a business name with the Ministry of Consumer and Business Services. All the income after normal expenses is attributable directly to the owner of the business. Any income more than approximately $118,000 is taxed at the highest marginal tax rate of 46.4 per cent.


So say you are a successful sole proprietor earning $225,000 per year. You are paying the absolute highest taxes on $107,000 of that income or, in numerical terms, $49,648. If you don’t require all the income to fund your lifestyle but would like to use some of that income to invest back into the business or save for a rainy day, the income is still taxable at the higher rate.

However, if you were incorporated, the business would be taxed at the much lower marginal tax rate on the first $400,000 and you could presumably retain profits in the company and even make investments for the corporation, which you could then draw upon in later years when your income was not in such a high tax bracket.

Of course, if you take all the profits out of the company, the government harmonizes tax rates so you would not have an advantage over the sole proprietor. The idea of the Small Business Deduction is to promote business growth and profit retention.

This is a very simple example, so before all you accountants and financial whizzes contact me to correct me, it is the general concept I am pointing out (actual numbers could vary based on a host of other factors).

Regardless, in order to adequately plan and take advantage of the Small Business Deduction you should consult with your accountant and the assistance of your lawyer to incorporate you and set up the company with an appropriate share structure.

Who says the government always penalizes the small guy?

Jeffrey D. Cowan is the principal of Cowan & Taylor, Barristers & Solicitors that practice in the areas of business and real estate law. E-mail The information contained in this article should not be relied upon as legal advice.

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