Can I claim the Small Business Deduction on all my active business income?

Only up to your business limit. The Small Business Deduction under ITA s. 125 gives a Canadian-controlled private corporation (CCPC) the lower federal corporate tax rate on the first $500,000 of active business income earned in Canada. The $500,000 limit is shared among associated corporations and reduced by two independent grinds.

The two grinds. Taxable capital grind (ITA s. 125(5.1)): the $500,000 limit is reduced on a straight-line basis when the group’s prior-year taxable capital employed in Canada exceeds $10 million and is fully eliminated at $50 million. Passive income grind (ITA s. 125(5.2)): the limit is reduced by $5 for every $1 of adjusted aggregate investment income above $50,000, eliminated when passive income reaches $150,000.

Example: an Ontario CCPC with $600,000 active business income and $80,000 of investment income. Passive-income grind: excess = $30,000; reduction = 5 x $30,000 = $150,000. Business limit becomes $350,000. SBD combined federal-plus-Ontario rate applies to the first $350,000; the remaining $250,000 of active income is taxed at the general corporate rate.

Ontario’s provincial small business rate for 2026 is 3.2%. Federal SBD rate is 9%. Combined SBD rate: 12.2%. General combined Ontario rate: 26.5%.

Note: An associated group aggregates the $500,000 limit and must file T2 Schedule 23 to allocate it. Missing the allocation defaults to zero for every group member.

Source: canada.ca — Small business deduction

— 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.