Active business income

What counts and what does not

The CRA describes active business income generally as income from a business source, including anything incidental to the business. For a Canadian-controlled private corporation, the Canadian part matters: the small business deduction looks at income from an active business carried on in Canada.

Two categories are generally left out. A specified investment business has the principal purpose of earning income from property such as interest, dividends, rents or royalties. A personal services business provides services that an officer or employee would usually perform, through an incorporated employee. Income from other specified corporate income rules can also fall outside.

The exceptions that can bring income back in

A specified investment business is treated as earning active business income if the corporation employs more than five full-time employees in that business throughout the year, or if an associated corporation provides management, financial, administrative or similar services that would otherwise need more than five full-time employees. A personal services business is not treated as one if the corporation employs more than five full-time employees throughout the year, or provides the services to an associated corporation. These exceptions are narrow and fact-specific.

An illustrative example

Suppose an Ontario CCPC earns $400,000 from its trade business and $20,000 of interest on retained cash. The $400,000 is generally active business income and may be eligible for the lower rate, up to its business limit. The $20,000 of interest is investment income and is generally taxed at higher rates. The amounts are illustrative and ignore expenses and credits. Income and expenses need to be sorted sensibly for this split to work.

Why it affects your tax bill

The small business deduction is based on the least of the corporation’s active business income earned in Canada, its taxable income and its business limit, after any reduction or assignment of that limit. Ontario’s lower rate, 2.2% from July 1, 2026, applies to income eligible for the federal deduction, and the higher 11.5% rate applies to the rest. Passive income also matters in a second way: when a CCPC group has enough adjusted aggregate investment income, the business limit is reduced between $50,000 and $150,000.

What to discuss with your accountant

Explain where your money really comes from: services, product sales, rent, interest or dividends. If you provide services to one client who treats you like an employee, raise it early, since that is the personal services business concern. Ask how management fees between related companies are handled, and whether the corporation has enough employees or associated support to qualify under the exceptions.