Small business deduction (SBD)
The small business deduction reduces the federal corporate tax rate on the first tranche of active business income earned by a Canadian-controlled private corporation.
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Key facts
| Category | Corporate tax |
|---|---|
| Also known as | SBD, small business rate |
| Applies to | Active business income of a CCPC, up to the annual business limit |
| Claimed on | T2 Schedule 7 and the T2 return; CO-17 in Québec |
| Shared | One limit across all associated corporations, allocated by agreement |
| Reduced by | Large passive investment income and high taxable capital |
| Authority | Canada Revenue Agency; Revenu Québec |
What it means in practice
The SBD applies to active business income only — not to investment income, and not to income from a specified investment business or a personal services business. The annual business limit is shared across a group of associated corporations, so splitting a business across several companies does not multiply the deduction. The limit is also ground down where the group holds substantial passive investments or has large taxable capital. Québec runs its own version with its own qualification tests, including a minimum-hours test that federal rules do not have. A corporation can qualify federally and still fail provincially.
Association and the shared limit
Corporations under common control, or linked through a chain of ownership or family relationships, are associated and must divide one business limit between them. Filing separate allocations that total more than the limit produces a reassessment for every corporation involved. The rules reach further than most owners expect: shares held by a spouse or a minor child, and options over shares, are all counted. Two apparently unrelated companies owned by two spouses can be associated. Québec applies an additional hours-worked test for the provincial rate on the same income, so a corporation can qualify federally and fail provincially in the same year.
FAQ
Does rental income qualify for the small business deduction?
What happens if my corporation holds a large investment portfolio?
Need this applied to your situation?
A definition only gets you so far. Talk to a Montréal CPA about what this means for your return — in English or French.