How does CCPC passive income affect my Small Business Deduction?
Under Income Tax Act s. 125(5.2), a CCPC’s $500,000 SBD business limit is reduced by $5 for every $1 by which adjusted aggregate investment income (AAII) in the previous tax year exceeds $50,000. The SBD is fully eliminated when AAII reaches $150,000, and the reduction is on top of the taxable-capital grind.
AAII, defined in s. 125(7), broadly captures a CCPC’s investment income after specific adjustments: it excludes taxable capital gains from active-business asset dispositions, and it excludes dividends from connected non-CCPCs. It includes: interest, rental income (unless the corporation employs more than five full-time employees), portfolio dividends, and net taxable capital gains from portfolio investments.
Example: an Ontario CCPC earned $80,000 AAII in fiscal 2025. Its 2026 business limit is reduced by 5 x ($80,000 – $50,000) = $150,000. Its available business limit is $500,000 – $150,000 = $350,000. Only the first $350,000 of active business income qualifies for the combined 12.2% SBD rate; the excess is taxed at the general 26.5% Ontario combined rate.
Planning levers: shift passive holdings to a Holdco to isolate the AAII trigger from the Opco’s SBD (works only where the group is not associated, or where AAII genuinely rests outside the Opco’s associated group). Time capital-gain crystallizations to non-SBD years. Consider IPP contributions to soak up cash that would otherwise generate AAII.
Note: The AAII grind uses the prior fiscal year’s number. Planning done in Q4 of one fiscal year can affect the SBD availability twelve months later.
Source: canada.ca â Passive investment income of a CCPC
— Bader A. Chowdry, CPA, CA, LPA — Insight Accounting CPA
Disclaimer: Bader A. Chowdry, CPA, CA, LPA is a Licensed Public Accountant regulated by CPA Ontario. Insight Accounting CPA Professional Corporation is a Chartered Professional Accountant firm. This content is general information only and does not constitute professional advice for your specific facts. Confirm current rules and figures with your own advisor before acting.