The Business Limit relates to income tax deductions available to Canadian corporations when filing Canadian corporate tax. The Business Limit is a set dollar amount that caps the amount of Small Business Deduction (SBD) a Canadian corporation may receive.
Currently the maximum allowable business limit is $500,000 (if the calendar year is 2009 or later). The rate is prorated based on the number of days in each calendar year for tax years (fiscal years) that straddle a calendar year.
The Small Business Deduction reduces the Part I income tax that the corporation would otherwise have to pay.
To receive the Small Business Deduction, a business has to be a Canadian-controlled Private Corporation (CCPC). Currently, a CCPC would pay about a 16 percent tax rate on the first $500,000 of its income, depending on where the corporation was set up.
The business limit is one of the factors used to determine how much of a Small Business Deduction a CCPC is entitled to.
"The Small Business Deduction (SBD) is calculated by multiplying the SBD rate by the least of the following amounts:
- the income from active business carried on in Canada (line 400);
- the taxable income (line 405);
- the business limit (line 410); or
- the reduced business limit (line 425)" (Chapter 4 of T4012: T2 Corporation - Income Tax Guide, Canada Revenue Agency).
The reduced business limit in the explanation from the T2 Corporation Income Tax Guide above refers to the fact that since large Canadian-controlled Private Corporations (CCPCs) that have taxable capital employed in Canada of $15 million or more do not qualify for the Small Business Deduction, the business limit is reduced on a straight-line basis for CCPCs that have taxable capital employed in Canada of between $10 million and $15 million in the previous year.
