Joint Committee, "Small Business Deduction Rules under Section 125 of the Income Tax Act - Follow-Up to Our Meeting with Canada Revenue Agency", 2 June 2017 Joint Committee Submission to Finance respecting the Small Business Deduction, appending Submission to Randy Hewlett of the Income Tax Rulings Directorate dated 14 February 2017

Issues with cooperatives (p. 2)

Every farming or fishing Canadian-controlled private corporation (“CCPC”) selling substantially all of its products to a co-operative in which it holds an interest will be ineligible for the small business deduction (“SBD”), and a similar issue arises if they pool resources to form a processing company. (The subsequent letter to Finance acknowledged May 2017 draft legislation on farming and fishing co-operatives and stated that “co-operatives operate in sectors beyond farming and fishing.”)

Unclear meaning of “direct or indirect interest” (pp. 7, 2 and 5)

It is unclear whether “income” means “net income,” and the meanings of “direct or indirect” and “interest” also are unclear.

A small business that banks at a local credit union could lose the SBD on services-contract income (e.g., IT services) earned from the credit union.

Mr. Smith has units in the iShares Dow Jones Fund, which holds Ford Motors which, in turn, holds Ford Canada. This may indicate that an auto parts manufacturer of which he is a shareholder loses the SBD on its income from Ford Canada.

Inadequacy of 10% cap/”any” related shareholder test (p. 3)

In rural areas with fewer customers to draw on, non-arm’s length customers could account for more than 10% of a CCPC’s active business income. For example, a shareholder of a major contractor might be related to a shareholder of a local building supply store, thereby denying SBC access to the latter.

A small contractor could lose SBD access on income from a significant contract with a large private corporation having a very small employee-shareholder who was related.

Rigour of “substantially all” test (p. 6)

Partnership X earns 15% of its income from providing services to B Co (which is 10% owned by a partner, namely, A Co) and otherwise from arm’s length customers. Para. (c) causes A Co’s specified partnership income to be nil.