Canada Small Business Deduction Guide (SBD)

the Small Business Deduction (SBD) in Canada. The SBD reduces the federal corporate tax rate from 15% to 9% on the first $500,000 of the active business income (ABI) earned by the Canadian-controlled private corporation (CCPC). The $500,000 business limit is shared among the associated corporations (the corporations under the common control). The business limit is reduced when the CCPC's taxable capital exceeds $10 million (the "capital phase-out" — the SBD is reduced by $1 for every $40 of the taxable capital above $10 million, fully eliminated at $15 million). The business limit is also reduced by the "specified corporate income" (the SCI) — the income from the partnerships, the joint ventures, and the related corporations (the "specified corporate income" reduction — the "adjusted business limit" — the SBD is reduced by 5x the SCI). The "active business income" — the income from the business carried on in Canada (the "active business" — the manufacturing, the services, the retail, the wholesale). The "specified investment income" (the AII — the interest, the dividends, the capital gains, the rental income from the non-active real estate) is NOT eligible for the SBD. The professional corporations (the "specified professional corporations" — the doctors, the lawyers, the accountants, the dentists, the veterinarians) are eligible for the SBD but are subject to the "specified corporate income" reduction. The provincial SBD — the provinces offer the reduced corporate tax rate on the first $500,000 of the ABI (the "provincial small business rate" — the combined federal+provincial SBD rate is approximately 11% to 13%).

Business Limit

Annual limit: $500,000 of the active business income (the "business limit" — the "SBD limit"). The SBD is calculated as 9% of the lesser of the ABI and the business limit (the "SBD calculation" — the 9% x the "adjusted business limit").
Capital phase-out: The business limit is reduced when the CCPC's taxable capital exceeds $10 million. The reduction is $1 for every $40 of the taxable capital above $10 million (the "capital phase-out rate" — 2.5% of the capital above $10 million). The business limit is fully eliminated when the taxable capital reaches $15 million.
Specified corporate income (SCI) reduction: The business limit is reduced by 5x the "specified corporate income" (the SCI — the income from the partnerships, the joint ventures, the corporations that are NOT associated). The SCI reduction applies when the SCI exceeds $50,000 (the "SCI threshold").
Associated corporations: The associated corporations must share the $500,000 business limit. The "associated" test — the corporations that are controlled by the same person or the group (the "de jure control" — the majority of the voting shares). The associated corporations can agree on the allocation of the business limit (the "SBD allocation" — the Form T2200 for the associated corporations).

Active Business Income (ABI)

ABI definition: The income from the "active business" — the business carried on in Canada by the CCPC. The "active business" includes the manufacturing, the services, the retail, the wholesale, the construction, the transportation, and the professional services (the "active business" — the "regular, continuous, and substantial" business activity).
Property income: The "income from the property" (the "specified investment income" — the interest, the dividends, the rent, the royalties, the capital gains) is NOT the ABI. The property income is taxed at the higher rate (the "aggregate investment income" — the AII — the federal rate of 38.67% before the refund).
Adjusted ABI: The ABI is reduced by the "specified corporate income" (the SCI) — the income from the partnerships, the joint ventures, and the corporations that are NOT associated. The "ABI for the SBD purposes" is the ABI minus the SCI.

Provincial Small Business Deduction

Ontario: The Ontario SBD rate is 3.2% (the "Ontario small business rate" — the combined federal+provincial rate is 12.2% on the first $500,000 of the ABI). The Ontario SBD threshold is $500,000 (the same as the federal).
BC: The BC SBD rate is 0% (the "BC small business rate" — the combined federal+provincial rate is 9% on the first $500,000 of the ABI). The BC SBD threshold is $500,000.
Alberta: The Alberta SBD rate is 0% (the "Alberta small business rate" — the combined federal+provincial SBD rate is 9% on the first $500,000 of the ABI). The Alberta SBD threshold is $500,000.
Quebec: The Quebec SBD rate is 3% (the "Quebec small business rate" — the combined federal+provincial SBD rate is 12% on the first $500,000 of the ABI). The Quebec SBD threshold is $500,000.

For the CCPC rules and the corporate tax rates, see our Corporate Tax Guide →. For the dividend tax credit and the dividend integration, see our Dividend Tax Credit Guide →.