46 What is the Small Business Deduction and how is it determined? (ITA 125)

Small business deduction (SBD) ITA 125 (1.1)

ITA 125 (1.1) is referred to a reduction in tax which is payable by a Canadian controlled private corporation in a taxation year.

SBD is equal to SBD rate of (19%) for the taxation year multiplied by lessor of:

1. active business income of the corporation in Canada (excluding certain income and exceeding certain losses) – ITA 125(1)(a)(i)
2. taxable income of the corporation for the year less estimated foreign income (see below for details) – ITA 125(1)(b)
3. business limit of the corporation for the year – ITA 125(1)(c)

Taxable income less foreign income – ITA 125 (1)(b)

The foreign income calculation in this formula is based on the foreign tax credit rather than the actual foreign income and changes depending on whether the foreign income is business related as follows:

• – foreign income is estimated at 100/28 of the foreign tax credit for foreign non-business income
• – foreign income is estimated at 4 X the foreign tax credit for foreign business income

Business limit ITA 125(2)

 ITA 125(2) for a corporation is $500,000 for a taxation year unless it is associated with another CCPC. If a CCPC is associated with one or more corporations in a taxation year, then the business limit can be split amongst the associated corporations. CCPC’s can assign all or a part of their business limit to another CCPC for a taxation year.

Business Limit Reduction – ITA 125(5.1)

A CCPC’s business limit is reduced by the greater of the taxable capital business limit reduction and the passive income business limit reduction:

• Taxable Capital Business Limit Reduction: CCPCs with taxable capital employed in Canada between $10 million and $50 million see a straight-line reduction in their small business limit. CCPCs with taxable capital exceeding $50 million are not eligible for the small business deduction.
• Passive Income Business Limit Reduction: If a CCPC or any associated corporation earns adjusted aggregate investment income (AII) of more than $50,000 in a given year, the business limit is reduced. The reduction is $5 for every $1 of AII over $50,000, with the business limit being eliminated entirely at $150,000 of AII.

October 2024