The business limit for the small business deduction is the maximum amount of active business income on which a Canadian-controlled private corporation (CCPC) or associated group of corporations can claim the small business deduction.
Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures received Royal Assent on June 21, 2018. This legislation reduces the business limit for CCPCs and their associated corporations that have income in excess of $50,000 from passive investments (ITA 125(5.1)). The business income of a corporation with passive income in excess of $150,000 will be $0.
The Reduced Business Limit of a Corporation is calculated as:
- (maximum business limit of $500,000 – (greater of ($0 and (passive investment income - $50,000)) × 5)).
Very Solvent Inc., a CCPC with $3.75 million in passive assets, invested at a 2% rate of return would continue to benefit from the small business tax rate on up to $375,000 of active business income, calculated as:
- (maximum business limit of $500,000 – (greater of ($0 and (passive investment income of ($3.75 million in passive assets invested at a 2% rate of return) - $50,000)) × 5)).