# What is Small Business Deduction (SBD)?

Country: Canada

The Small Business Deduction reduces the federal corporate tax rate from 15% to 9% for Canadian-Controlled Private Corporations on the first CAD 500,000 of active business income per year. The deduction is subject to reduction for associated corporations, passive investment income, and taxable capital above CAD 10 million.

## Current rate (Corporate fiscal year (any 12-month period))

Reduces federal rate to 9% (from 15%) on first CAD 500,000 of active business income for CCPCs

## Example

A CCPC earns CAD 600,000 active business income. The first CAD 500,000 is taxed at 9% (CAD 45,000 federal tax). The remaining CAD 100,000 is taxed at the general 15% rate (CAD 15,000). Total federal corporate tax: CAD 60,000. Without the SBD the full amount would attract CAD 90,000 at 15%.

## How Small Business Deduction (SBD) works in Canada

The Small Business Deduction (SBD) is the single most valuable tax concession available to Canadian small business owners operating through a CCPC. Understanding how it is calculated, and what erodes it, is essential for tax planning.

**How the SBD works**

The SBD reduces the federal corporate income tax rate from 15% to 9% on the lesser of: the corporation's active business income earned in Canada, the SBD business limit for the year (normally CAD 500,000 reduced by associated company and other grinds), and the corporation's taxable income. The 6% reduction (15% minus 9%) on CAD 500,000 saves CAD 30,000 in federal tax annually.

**Active business income vs. investment income**

The SBD applies only to active business income, not investment income. Active business income is income from a business other than a specified investment business or a personal services business. Rental income, interest, dividends from non-connected corporations, and capital gains are investment income and do not qualify for the SBD.

**The passive income grind**

Since 2019, CCPCs with significant passive investment income face a reduction in their SBD business limit. When the adjusted aggregate investment income (AAII) of the corporation and its associated corporations exceeds CAD 50,000 in the prior taxation year, the business limit is reduced by CAD 5 for every CAD 1 of AAII above CAD 50,000. The business limit is fully eliminated when AAII reaches CAD 150,000. AAII includes interest, rental income, taxable capital gains, dividends from non-connected corporations, and passive income from partnerships, less deductible business losses.

**The taxable capital grind**

The SBD business limit is also reduced based on the corporation's (and associated corporations') taxable capital employed in Canada. The reduction begins when taxable capital exceeds CAD 10 million and the SBD is fully eliminated at CAD 50 million. This grind affects larger, capital-intensive CCPCs.

**Associated company rules**

The CAD 500,000 business limit must be shared among all associated corporations. Corporations are associated when they are controlled by the same person or group, or when one controls the other. Association prevents owners from multiplying the SBD by creating multiple CCPCs. Associated corporations must file an election (Schedule 23) to allocate the business limit among themselves.

**Provincial small business rates**

Most provinces also provide a reduced corporate income tax rate for CCPCs on income eligible for the federal SBD. Combined federal and provincial small business rates range from approximately 9% (Manitoba) to 12.2% (PEI). The provincial rate varies by province and changes regularly.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4012/t2-corporation-income-tax-guide-chapter-4-page-4-of-the-t2-return.html

## Related terms

- [CCPC (Canadian-Controlled Private Corporation)](https://accounts-os.com/ca/glossary/ccpc-ca)
- [T2 Corporate Income Tax Return](https://accounts-os.com/ca/glossary/t2-ca)
- [RDTOH (Refundable Dividend Tax on Hand)](https://accounts-os.com/ca/glossary/dividend-refund-ca)
- [SR&ED (Scientific Research and Experimental Development)](https://accounts-os.com/ca/glossary/sred-ca)