46 What is the Small Business Deduction and how is it determined?

Small Business Deduction ITA 125

Small business deduction (SBD) 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) 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 taxable capital business limit reduction and passive income business limit reduction.

Taxable capital business limit reduction – Large CCPC’s with more than $15M do not qualify for SBD. The business limit is reduced on a straight-line basis for corporations that have taxable capital between $10M to $15M in previous years.

Passive income business limit reduction – A CCPC’s business limit is reduced if the corporation or any other associated corporation combined earn $50,000 to $150,000 from passive investments.

References and Resources:

• ITA – 125
• Article – “Small business deduction rules” (Author: Government of Canada)
• Article – “T2 Corporation – Income Tax Guide – Chapter 4: Page 4 of the T2 return” (Author: Government of Canada)