The small business deduction (SBD) limit allows a Canadian Controlled Private Corporations (CCPC) to pay low rate tax on its first $500,000 of active business income in Canada each year. This threshold is shared among all associated CCPC’s. In general, the SBD limit is based on the least of three amounts:

1. Active business income earned in Canada doesn’t include any income for the year that is property income (including interest, dividends and rental income)
2. Taxable income doesn’t include any non-deductible expenses such as amortization and life insurance premiums
3. Small business income threshold of $500,000.

For example, a company in British Columbia would pay only 13.5% of their active taxable income up to $500,000. If a company has income over this amount, then it would pay 26% in corporate tax on any amounts over the first $500,000.

In comparison, a self-employed individual would have to pay 45.8% tax on taxable income over $150,000. This provides some good tax planning opportunities of leaving money in the company until a later date, thereby deferring tax. Canada has one of the lowest corporate tax rates in the world. If you are considering opening a business, then you should consider incorporating your company in BC to take advantage of the low tax rates.