The small business deduction (SBD) reduces federal corporate tax on active business income up to the $500,000 business limit — and that limit is shared among associated Canadian-controlled private corporations (CCPCs). Two "grinds" can shrink it: the taxable-capital grind reduces the limit as combined taxable capital employed in Canada moves from $10 million to $50 million (eliminated at $50 million), and the passive-income grind reduces it by $5 for every $1 of adjusted aggregate investment income (AAII) above $50,000 (eliminated at $150,000). When both apply, the reduction is the greater of the two. This guide explains each piece for Alberta and BC owner-managers. Source: Corporation tax rates — Canada.ca.
What the SBD does
The SBD lets a CCPC pay tax on its active business income at the reduced small-business rate instead of the general corporate rate — but only on income within the $500,000 business limit. Active business income above the limit is taxed at the general rate. In Alberta, that combination produces a notably low combined small-business rate; in BC it is also competitive. The SBD is one of the main reasons owner-managers incorporate, so protecting the full $500,000 limit is worth real planning.
The $500,000 limit is shared among associated companies
The business limit is not per company — it is shared among associated CCPCs. A group of associated corporations must allocate the one $500,000 limit among themselves; they cannot each claim a fresh $500,000. This rule stops owners from multiplying the SBD by splitting active income across several related corporations. Determining which companies are associated is a technical test, and getting the allocation right across a group is a common planning task.
Grind 1: the taxable-capital reduction
The business limit is reduced where the combined taxable capital employed in Canada of the corporation and its associated group sits between $10 million and $50 million. The reduction grows as taxable capital rises through that band, and the business limit is fully eliminated once combined taxable capital reaches $50 million — above that, no SBD is available.
| Combined taxable capital employed in Canada | Effect on the business limit |
|---|---|
| $10 million or less | No reduction — full $500,000 available |
| Between $10 million and $50 million | Business limit reduced on a sliding basis |
| $50 million or more | Business limit fully eliminated |
A current proposal to widen this band beyond $50 million has not been confirmed as enacted, so the figures above — the $10 million to $50 million range — are the ones to apply. Source: Passive investment income and the small business deduction — Department of Finance Canada.
Grind 2: the passive-income reduction
The second grind targets passive investment income held inside a CCPC. The business limit is reduced by $5 for every $1 of adjusted aggregate investment income (AAII) above $50,000, and it is fully eliminated when AAII reaches $150,000.
| Adjusted aggregate investment income (AAII) | Effect on the business limit |
|---|---|
| $50,000 or less | No reduction from this grind |
| Between $50,000 and $150,000 | Reduced by $5 for every $1 of AAII over $50,000 |
| $150,000 or more | Business limit fully eliminated |
Because the reduction is $5 per $1, a relatively modest amount of passive income erodes the limit quickly: at $100,000 of AAII, the limit is already reduced by $250,000. Source: Passive investment income and the small business deduction — Department of Finance Canada.
When both grinds apply: take the greater
If both the taxable-capital grind and the passive-income grind would reduce the limit, the actual reduction is the greater of the two — not the sum. You compute each reduction separately, then apply whichever is larger, producing a single reduced business limit to which the small-business rate applies. For a group with both large taxable capital and significant passive income, this means modelling both before assuming a $500,000 limit is intact.
How it ties into your corporate tax
The SBD sits at the heart of corporate-tax planning: it interacts with how much salary versus dividend an owner draws, with how much investment income a holding company accumulates, and with the structure of an associated group. For the rate mechanics behind the SBD, see our Alberta corporate tax guide and BC corporate tax guide, and model your own numbers with the corporate tax calculator.
How RN Canada helps
RN Canada helps Alberta and BC owner-managers protect the small business deduction — allocating the $500,000 limit correctly across an associated group, modelling the taxable-capital and passive-income grinds before they bite, and structuring corporate investment income so the limit is not quietly eroded. Our bookkeeping and tax filing service handles the T2 and the SBD calculation, while corporate finance and capital restructuring addresses group structure. Browse related questions in our corporate tax FAQ.
This page is general information, not personalized tax, accounting, or legal advice. Speak with RN Canada about your specific situation.
Frequently asked questions
The small business deduction (SBD) lowers federal corporate tax on active business income up to the $500,000 business limit. The reduced small-business rate applies only to active business income within that limit; income above it is taxed at the general rate. The $500,000 limit is shared among associated Canadian-controlled private corporations, so a group of related companies divides one limit rather than each getting its own.
The business limit is reduced where the combined taxable capital employed in Canada of the corporation and its associated group is between $10 million and $50 million. The reduction increases as taxable capital rises through that range and the business limit is fully eliminated once combined taxable capital reaches $50 million, at which point no small business deduction is available.
The business limit is reduced by $5 for every $1 of adjusted aggregate investment income (AAII) above $50,000. The reduction begins once AAII exceeds $50,000 and the business limit is fully eliminated when AAII reaches $150,000. So a CCPC earning $150,000 or more of passive investment income in the relevant year has no small business deduction left from this grind.
When both the taxable-capital grind and the passive-income grind would apply, the actual reduction to the business limit is the greater of the two — not the sum. You calculate each reduction separately, then apply whichever is larger. The result is a single reduced business limit that the small-business rate applies to.
Yes. The $500,000 business limit is shared among associated Canadian-controlled private corporations. A group of associated CCPCs must allocate the one limit among themselves rather than each claiming a full $500,000. This prevents owners from multiplying the small business deduction by spreading active income across several related corporations.