The small business deduction reduces the federal corporate tax rate on a Canadian-controlled private corporation's active business income, up to an annual limit that is currently $500,000. The result is a meaningfully lower combined corporate rate on income within the limit.
Access to the deduction is restricted in several ways. The annual limit is shared among associated corporations. It is reduced where the corporation's passive investment income exceeds a threshold. Personal services businesses and specified investment businesses do not qualify. Because the deduction is one of the larger tax preferences available to private companies, losing access through association, passive-income grind, or business classification can substantially raise the effective tax rate.