Business limit

The business limit sits in section 125 of the Income Tax Act. It caps how much of a Canadian-controlled private corporation’s (CCPC’s) income can attract the small business deduction. In a purchase, ask whether the target is associated with other corporations and so shares its limit with them.

How the limit works

• Under section 125(2), a corporation associated with other CCPCs in the year has a business limit of nil, except as otherwise provided in section 125.
• Associated CCPCs can file an agreement in prescribed form that assigns a percentage of the limit to one or more of them (section 125(3)). A CCPC can also assign all or part of its limit to another CCPC that earns income from providing services or property directly to it, subject to the conditions in section 125(3.2).
• The CRA’s T2 guide says the limit is reduced by the greater of a taxable capital reduction and a passive income reduction.

Differences by province

The CRA’s T2 guide says some provinces and territories use the federal business limit and others set their own. Ask which regime applies where the company earns its income. Our answer on buying a company with the deduction goes further, and active business income is the income the limit applies to.