Small business deduction (SBD)

You meet the SBD when a buyer or seller compares after-tax profit of a private company. Subsection 125(1) of the Income Tax Act gives the deduction to a CCPC, and the least-of test includes the corporation’s active business income, an adjusted taxable income amount, and its business limit. The CRA’s page on associated corporations adds that the limit may be subject to reductions generally based on the size and type of income earned by the corporation and its associated corporations.

How it differs by province

The CRA says provinces and territories generally have a lower and a higher rate, and the lower rate applies to income eligible for the federal deduction. Some use the federal business limit and others set their own. The CRA’s Ontario page says the Ontario small business deduction reduces the Ontario basic income tax of a corporation that was a CCPC throughout the tax year. The CRA’s British Columbia page sets out a provincial lower rate and a British Columbia business limit. The CRA’s table leaves out Quebec and Alberta, which it says do not have corporation tax collection agreements with the CRA, so check those provinces’ own rules.

What to ask

• Whether the company was a CCPC throughout the year
• Which associated corporations share its limit
• Which province or territory taxes the income, and under which rule

For a purchase, read the answer on whether the deduction carries over.