You might think that the definition of a small business in Canada should be straightforward. After all, as of Dec 2019, there were 1.2 million small businesses in Canada, which is 97.9% of all the employer businesses in Canada.
So, the vast majority of companies in Canada would be considered small businesses.
Defining a small business in Canada is not as straightforward as you would think, however, and it’s understandable that people struggle with this as there are several definitions depending on who you are speaking to.
Making sure you are correct when claiming to be a small business is, however, very important. Understanding the different definitions is essential when applying for loans and grants for example.
Let’s have a look at them all so you are forewarned and forearmed when it comes to discussing what a small business is in Canada in any circumstance.
What is a small business?
There are several categories of business, micro business, small business, large business, and a variety of definitions of what factors constitute your company’s designated category.
Industry Canada’s definition of a small business is itself broken down into sections too. If your company has less than five employees then you are considered a micro business.
For goods producers, a company with between five and one hundred employees is considered a small business.
A service company, on the other hand, is considered a small business if they have between five and fifty employees.
Companies where the number of employees is over those designated amounts but less than 500 are considered medium-sized companies. And any company with more than 500 employees is a large company.
The Canadian Bankers Association, on the other hand, doesn’t count the number of employees at all in their designation of small businesses. Instead, they are focused on the credit limits of companies to differentiate their size.
A small business, in their eyes, is a company that has a credit limit of less than $500,000.
Businesses with a credit limit of between $500,000 and $1 million are medium-sized companies. And any company with a limit above that is a large company.
Export Development Corporation
While the Export Development Corporation only looks at exporters, their criteria for differentiating size is different again. Their assessments are based on revenue generated from exports.
In this instance, a small business is one that has less than $1 million in export sales.
Canadian Small Business Financing Program
Just to add to the confusion the Canadian Small Business Financing Program has another definition again, which is odd given that they are run by Industry Canada. For them, the size of the business is based on their yearly revenue.
A small business is one that has an annual revenue of less than $5 million.
Treasury Board of Canada Secretariat
In general, the definition of a small business is the one by the Treasury Board of Canada Secretariat, which is a company with less than 100 employees and annual gross revenue of between $30,000 and $5 million.
Why is it important to understand if you have a small business or not?
There are a number of reasons you want to be sure that your company is a small business.
Arguably the two most important reasons are for any financial applications (to the Canadian Small Business Financing Program for example) and when applying for the SBD tax deductions.
The SBD (small business deduction) is available for small businesses in Canada and means that they are eligible for a lower corporation tax rate.
Your company must also meet the CCPC (Canadian controlled private corporation) eligibility criteria, in order to qualify for the deductions.
For the avoidance of doubt these are:
- Must be a private corporation
- Must be a corporation that was resident in Canada and was either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the tax year
- it is not controlled directly or indirectly by one or more non-resident persons
- it is not controlled directly or indirectly by one or more public corporations
- it is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada
- it is not controlled directly or indirectly by any combination of persons described in the three previous conditions
- if all of its shares that are owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation with a class of shares listed on a designated stock exchange were owned by one person, that person would not own sufficient shares to control the corporation
- no class of its shares of capital stock is listed on a designated stock exchange
You can find out more about the SBD rules here.
Small Business resources
There are a lot of resources out there for small businesses, and plenty of things to be considered when setting up and running your company. Registering your business, taxes, audits, payroll, income and expense reporting, and more.
All of these things are important to do, and all contribute towards your qualification as a small business.
Here are some resources to help with all of these and more:
Registering for a business number – there are a few different ways of officially registering your business, and this link guides you through them all. You can find out more about why you need a business number here.
Registering for CRA – having a secure online account with the CRA is the ideal way of managing your business accounts for GST/HST, payroll, and taxes.
Liaison Officer – you can actually get a free liaison officer from the CRA (Canadian Revenue Agency) who will help small businesses set up and understand their tax obligations. It’s a great service and really worth doing.
Audits – from time to time your company may be chosen for an audit. This link gives you all the information you need to make sure everything runs smoothly.
Income tax reporting – this is another great resource for understanding your income tax reporting obligations.
Corporation income tax – similarly, for your corporation income tax report, this is a great link for all you need to know.
Payroll – for understanding all your payroll needs, this goes through everything you need to know, from setting up a new employee, calculating deductions and contributions, to sending in your returns.
Business income and expense reporting – a full guide on completing your T2125 form, and helping you understand what is and isn’t an eligible capital expenditure, etc.
There is no end of support out there to make sure you are running your business correctly, and categorizing your business correctly. Small businesses are the foundation of the Canadian economy, so understanding what constitutes a small business is important.
