Understanding the Small Business Deduction (SBD) for Canadian Corporations

Many incorporated Canadian businesses can benefit from paying lower taxes on their first $500,000 of active business income thanks to the Small Business Deduction (SBD). This deduction reduces the corporate tax rate, allowing you to keep more of your profits. However, there are specific rules about eligibility, income limits, and how investment income or associated corporations can affect your deduction.

Examples of How the SBD Works

Example 1: Eligible CCPC with No Associated Companies
Sarah owns a consulting company structured as a Canadian-controlled private corporation (CCPC). Her business earns $400,000 in active business income this year. Since she is under the $500,000 SBD limit and has no associated corporations, she can claim the full SBD and pay a lower tax rate on all her profits.

Example 2: Associated Corporations
Mike owns a manufacturing company and also controls another corporation. Both companies are considered “associated” and must share the $500,000 SBD limit. If each company earns $400,000, the combined total eligible for the lower tax rate is $500,000—not $800,000. Additionally, if their combined investment income exceeds $50,000, their SBD limit may be further reduced.

Frequently Asked Questions

Q: What is the $500,000 business limit?
A: The $500,000 limit is the maximum amount of active business income eligible for the lower small business tax rate each year.

Q: How does investment income affect the SBD?
A: If your corporation or any associated corporations earn more than $50,000 in investment income, your SBD limit will be reduced proportionally.

Q: Do I need to share the SBD if I own multiple companies?
A: Yes. Associated corporations must divide the $500,000 SBD limit among them.

Takeaway:
The Small Business Deduction can significantly reduce taxes for Canadian business owners. For personalized advice on maximizing your SBD and staying CRA-compliant, contact Ali Asghar CPA in Toronto.