Small business deduction (SBD) reduces part I tax that the corporation would otherwise have to pay. It is only available to corporations that were Canadian-controlled private corporations (CCPCs) throughout the tax year.
The SDB rate is 17%. The SBD is calculated by multiplying the SBD rate by the lease of the following amounts:
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- the income from active business carried on in Canada (line 400);
- the taxable income (line 405);
- the business limit (line 410); or
- the reduced business limit (line 425).
Small business deduction can be claimed only on active business income (ABI) earned in Canada. Active business includes any business, as well as an adventure or concern in the nature of trade, but excludes 1) a business that derive its income from property (for example, rent) and has less than six full-time employees; and 2) a personal services business.
Small business deduction brings down federal tax rate on a CCPC’s ABI to 11%. The rate will decrease to 10.5% in 2016, 10% in 2017, 9.5% in 2018, and 9% in 2019.
Only a limited amount of ABI qualifies for the small business deduction. The current federal limit is $500,000. If two or more companies are associated, the deduction limit mus be shared among the companies.
The ability to claim the small business deduction is restricted for the larger CCPCs whose taxable capital exceeds $10 million for the preceding year. The amount eligible for the low rate is proportionately reduced if the taxable capital is between $10 million and $15 million. No small business deduction is available if taxable capital is more than $15 million.