Small business tax rates in Quebec: The impact of the 5,500-hour rule

Why could this rule affect your tax rate?

Do you operate a corporation? Do all your employees combined work fewer than 5,500 hours a year? The current tax rules regarding deductions for small businesses can have a direct impact on your tax rate.

Small business deduction (SBD): Rules and tax implications

To be eligible for the Québec small business deduction (SBD), you will now have to make sure that your employees work at least 5,500 hours. Otherwise, you cannot benefit from the reduced tax rate on the first $500,000 of business income.

Understanding the 5,500-hour rule

For your yearly tax return, here are the key criteria to consider when calculating the number of hours worked:

• The hours must be worked and paid;
• A maximum of 40 hours per week per employee may be counted;
• You, the professional, are considered an employee, regardless of your compensation. Note that even if you work 60 hours a week, you can only count 40 hours in the calculation.

How is the 5,500-hour rule applied?

5,500-hour threshold:

Corresponds to the maximum small business deduction (full reduced rate).

Reduction range:

Between 5,000 and 5,500 hours, the small business deduction is gradually reduced.

No deduction:

Below 5,000 hours, the small business deduction is cancelled.

Pooled hours and professional structures: A risk often underestimated

If you belong to a group of professionals who have formed a partnership to share your income and your expenses, you should perhaps review your agreement. 

The multiplication of the SBD is no longer possible between affiliated companies

The measures announced in the 2017 federal budget changed the application structure for the small business deduction (SBD) and resulted in significant changes in the tax rates for professionals.

Table 1 – Application of the SBD: Before and after legislative changes

Simplifying the pool structure: A strategic decision for professionals

An opportunity to review the agreement based on the group’s structure

These changes are an opportunity for all the professional partners of a partnership to review their agreement, consolidate it, and validate their mutual interest in collaborating and in benefiting from the synergies of the group.

Some groups may want to reorganize the way they operate and consider the possibility of the partners transferring their social shares to their corporation. Making the professionals’ corporations partners of the partnership will simplify the administration of the group.

Why simplify the pool structure?

There are many good reasons for doing so.

• Bill preparation and monitoring of accounts payable will no longer be necessary, since the corporation will no longer be a subcontractor of the pool.
• The distinction between professional activities and other, non-professional activities will no longer be necessary.
• Personal income will no longer be attributed for non-professional activities.

How can you assess the actual impact of this rule on your business?

Make things easier for yourself! To assess the appropriateness of remaining in a pool, simplify its structure and facilitate the accounting management, fdp Private Wealth Management gives you access to all the resources you need to help you make the right choices.

For more detailed answers and an in-depth analysis of your situation, place your trust in one of our Wealth Management advisors.