T2 Corporation – Income Tax Guide – Chapter 4: Page 4 of the T2 return
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- Small business deduction
- Avoidance of the business limit and taxable capital limit
- Preventing multiplication of the small business deduction
- Line 400 – Income from active business carried on in Canada
- Line 405 – Taxable income for the SBD
- Line 410 - Business limit
- Line 425 – Reduced business limit
- Assignment of the business limit under subsection 125(3.2)
- Line 430 – Small business deduction
Small business deduction
Corporations that were Canadian-controlled private corporations (CCPCs) throughout the tax year may be able to claim the small business deduction (SBD). The SBD reduces Part I tax that the corporation would otherwise have to pay.
The SBD is 17.5% (17% before 2016) of whichever of the following amounts is less:
- the income from active business carried on in Canada (line 400)
- the taxable income (line 405)
- the business limit (line 410)
- the reduced business limit on line 425 less the amount of the business limit you assigned under subsection 125(3.2) (line 427)
The following sections explain each of the above amounts.
For tax years ending after 2016, the SBD will remain at the 2016 level of 17.5%, resulting in a small business tax rate of 10.5%. This last rate was 11% before 2016.
Under proposed changes, the SBD will increase to 18% effective January 1, 2018, and to 19% effective January 1, 2019, resulting in small business tax rates of 10% and 9%.
If the rate changes during the tax year, you have to base your calculation on the number of days in the year that each rate is in effect.
Once you have calculated the SBD, enter it on line 430.
Avoidance of the business limit and taxable capital limit
For tax years that begin after March 21, 2016, where two corporations (Corps A and B) are deemed to be associated because they are associated with the same third corporation (Corp C), but because they have filed a Schedule 28 election, they are not associated for determining the SBD:
- investment income derived from an associated corporation’s active business is ineligible for the SBD and is taxed at the general corporation income rate, and
- Corps A and B must calculate their respective SBD as if each corporation were still associated with Corp C (that is, it must include the taxable capital limit of Corp C)
Preventing multiplication of the small business deduction
For tax years that begin after March 21, 2016, to prevent the multiplication of the SBD, the specified partnership rules will also apply to partnership structures in which a CCPC provides services or property to a partnership during the tax year of the CCPC, where the CCPC or a shareholder of the CCPC is a member of the partnership. A similar measure also applies for corporate structures that multiply access to the SBD.
Line 400 – Income from active business carried on in Canada
Complete Schedule 7, Aggregate Investment Income and Active Business Income, to determine the following amounts:
- the aggregate investment income and foreign investment income for determining the refundable portion of Part I tax (see Refundable portion of Part I tax, Lines 440, 445, and 450 for details)
- the specified partnership income for members of a partnership
- the income from an active business carried on in Canada for the SBD
For tax years that begin after March 21, 2016, CCPCs may assign all or part of their business limit under subsection 125(3.2) or specified partnership business limit under subsection 125(8) to another corporation.
Use Schedule 7 to assign all or part of your specified partnership business limit to another corporation.
If another corporation assigned all or part of its business limit or specified partnership business limit to your CCPC, also file Schedule 7.
If you are assigning all or part of your business limit to another corporation, report it on page 4 of the T2 return.
If claiming a deduction for patronage dividends on line 416 of Schedule 1, complete Part 5 of Schedule 16 to establish active business income carried on in Canada.
Active business income
Generally, active business income is income earned from a business source, including any income incidental to the business.
Income from a specified investment business or from a personal services business is generally not considered active business income and is not eligible for the SBD. The following two sections explain when income from these types of businesses may be considered to be active business income and eligible for the SBD.
Specified investment business
A specified investment business is a business with the principal purpose of deriving income from property, including interest, dividends, rents, or royalties. It also includes a business carried on by a prescribed labour-sponsored venture capital corporation, the principal purpose of which is to derive income from property.
Except for a prescribed labour-sponsored venture capital corporation, income from a specified investment business is considered to be active business income, and is therefore eligible for the SBD if:
- the corporation employs more than five full-time employees in the business throughout the year, or
- an associated corporation provides managerial, financial, administrative, maintenance, or other similar services to the corporation while carrying on an active business, and the corporation would have to engage more than five full-time employees to perform these services if the associated corporation were not providing them
The business a credit union carries on, or the business of leasing property other than real property, is not considered specified investment business.
Personal services business
A personal services business is a business that a corporation carries on to provide services to another entity (such as a person or a partnership) that an officer or employee of that entity would usually perform. Instead, an individual performs the services on behalf of the corporation. That individual is called an incorporated employee.
Any income the corporation derives from providing the services is considered income from a personal services business, as long as both of the following conditions are met:
- the incorporated employee who is performing the services, or any person related to him or her, is a specified shareholder of the corporation
- the incorporated employee would, if it were not for the existence of the corporation, reasonably be considered an officer or employee of the entity receiving the services
However, if the corporation employs more than five full-time employees throughout the year or provides the services to an associated corporation, the income is not considered to be from a personal services business. Therefore, the income is eligible for the SBD.
For more information on the factors to take into account when a person is considered an employee, see Guide RC4110, Employee or self-employed? or go to Canada Pension Plan (CPP) and Employment Insurance (EI) Rulings.
Specified cooperative income
For tax years that begin after March 21, 2016, the definition of specified corporate income is amended to exclude specified cooperative income, so that such income stays eligible for the SBD by default.
Specified cooperative income of a corporation (the selling corporation) means its income (other than patronage dividends paid to it by a cooperative out of its profits to its members) from the sale of the farming products or fishing catches of the corporation's farming or fishing business to an arm’s length corporation that is either:
- a cooperative corporation (for this purpose, the meaning of cooperative corporation under the Income Tax Act is extended to include fishing businesses), or
- held directly or indirectly by a cooperative corporation (extended to include fishing businesses) that is itself held directly or indirectly by the selling corporation (or one of its shareholders) or a person who does not deal at arm’s length with the selling corporation (or one of its shareholders)
A specified shareholder is a taxpayer who owns, directly or indirectly at any time in the year, at least 10% of the issued shares of any class of capital stock of the corporation or a related corporation.
How to calculate income from an active business carried on in Canada
Generally, to calculate active business income from carrying on a business in Canada, you have to deduct from net income for income tax purposes any of the following amounts that apply:
- taxable capital gains minus allowable capital losses
- dividends that are deductible from income under sections 112 and 113, and subsection 138(6)
- property income minus property losses
- property income from an interest in a trust
- foreign business income
- income from a specified investment business
- income from a personal services business
Specified partnership income
A corporation that is a member of a partnership has to complete Schedule 7 to calculate its active business income.
The corporate partnership rules impose a limit on the amount of active business income earned by a partnership that is eligible for the SBD. This amount is allocated among all partners.
For tax years beginning after March 21, 2016, special rules apply to designated members of a partnership. Their specified partnership business limit is nil, unless they get an amount assigned from a member of the partnership.
Specified partnership income is the amount of partnership income eligible for the SBD that is allocated to the corporation. You have to add this income to your active business income.
If the partnership incurs a loss from carrying on an active business, you have to deduct the corporation's share of that loss from its active business income. This is referred to as a specified partnership loss.
If your corporation is a member of a partnership in respect of which it filed a Schedule 73, you have to add or deduct the total active business income determined under section 34.2.
If the corporation received an information slip T5013, Statement of Partnership Income, that shows its share of partnership income or loss, keep it in case we ask for it later. Do not include this form with the return. For more information about this slip, see information slip T5013.
On line 400, enter the total active business income you calculated on Schedule 7.
Subsections 125(1), 125(7), 125(8), and 248(1)
IT‑73, The Small Business Deduction
Line 405 – Taxable income for the SBD
The taxable income you use to calculate the SBD is usually the amount entered on line 360. However, if you have claimed a foreign non-business income tax credit, a foreign business income tax credit, or both, you have to reduce the taxable income by:
- 100/28 of the amount that would be deductible as a federal foreign non-business income tax credit on line 632, if that credit was determined without the refundable tax on the CCPC's investment income (line 604) and without reference to the corporate tax reduction under section 123.4, and
- four times the amount that would be deductible as a federal foreign business income tax credit (line 636) if that credit was determined without reference to the corporate tax reduction under section 123.4. See general rate reduction percentage
You also have to reduce taxable income by any amount that, because of federal law, is exempt from Part I tax.
On line 405, enter your taxable income for the purposes of calculating the SBD.
Line 410 – Business limit
The maximum allowable business limit for a corporation that is not associated with any other corporation is $500,000.
CCPCs that are associated with one or more corporations during the tax year have to file Schedule 23, Agreement Among Associated Canadian-Controlled Private Corporations to Allocate the Business Limit. On this schedule, a percentage of the business limit is allocated to each corporation, and the total of all percentages cannot be more than 100%. For more information about this schedule, see Schedule 23.
On line 410, enter the business limit for the year. If applicable, enter the amount from Schedule 23.
If the tax year is shorter than 51 weeks, you have to prorate the business limit, based on the number of days in the tax year divided by 365, before you enter it on line 410.
If you elect not to be an associated corporation with two other corporations for the small business deduction, you have to file Schedule 28, Election not to be an Associated Corporation. For more details, see Schedule 28
Subsections 125(2), 125(3), 125(5), and 256(2)
IT‑64, Corporations: Association and Control
Line 425 – Reduced business limit
Large CCPCs that have taxable capital employed in Canada of $15 million or more do not qualify for the SBD. The business limit is reduced on a straight-line basis for CCPCs that have taxable capital employed in Canada of between $10 million and $15 million in the previous year. Similar restrictions apply to any CCPC that is a member of an associated group that has, in total, more than $10 million of taxable capital employed in Canada.
To calculate the total taxable capital employed in Canada, use whichever one of the following schedules that applies:
- Schedule 33, Taxable Capital Employed in Canada – Large Corporations
- Schedule 34, Taxable Capital Employed in Canada – Financial Institutions
- Schedule 35, Taxable Capital Employed in Canada – Large Insurance Corporations
If your taxable capital employed in Canada is more than $10 million, file the appropriate schedule with your return.
Use Schedule 23, Agreement Among Associated Canadian-Controlled Private Corporations to Allocate the Business Limit, if you are an associated CCPC. For more information about this schedule, see Schedule 23.
Assignment of the business limit under subsection 125(3.2)
For tax years that begin after March 21, 2016, CCPCs can assign all or part of their business limit under subsection 125(3.2) or specified partnership business limit under subsection 125(8) to another corporation.
If the tax year of the corporation started before and ends on or after March 22, 2016, in the tax year of another CCPC, the corporation can make an assignment of the business limit or the specified partnership business limit to that other CCPC if that other CCPC’s tax year started after March 21, 2016.
Enter the amount of the business limit you assign and the business number of the corporation to which you assign such an amount on page 4 of the T2 return. Deduct the amount you assign from line 425. Enter the result on line 427.
To assign your specified partnership business limit, file Schedule 7.
If another corporation assigned all or part of its business limit or specified partnership business limit to your CCPC, also file Schedule 7.
Subsections 125(3.1), (3.2), (7), and (8)
Line 430 – Small business deduction
Multiply the least of lines 400, 405, 410, and 427 by 17.5% (17% before 2016).
Under proposed changes, the small business deduction rate will increase to 18% in 2018 and 19% in 2019.
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