Active Business Income

Under Section 125(7) of the Income Tax Act, Active Business Income refers to income of a corporation from any business activity other than a Specified Investment Business or a Personal Services Business. This includes income from an adventure or concern in the nature of trade.

Income that is incidental or related to a corporation’s active business also qualifies as Active Business Income.

The definition of Active Business Income is intended to capture income generated through direct involvement of the taxpayer in the operation of the business, as opposed to income generated from passive sources, such as interest, royalties, etc. which require little or no active participation.

A Canadian-Controlled Private Corporation (CCPC) earning Active Business Income of $500,000 or less annually, qualifies as a small business and is eligible for a tax credit commonly referred to as the ‘small business deduction’. While widely known as a deduction, it is technically a tax credit. This incentive reflects the government’s effort to support small business corporations.

The full tax credit remains available for the corporation, until its taxable capital employed in Canada exceeds $10 million. The credit is then gradually reduced and is fully eliminated when that capital reaches $50 million. It is also eliminated where the corporation’s Adjusted Aggregate Investment Income (a term, which mostly refers to passive income) exceeds $50,000, and reaches $150,000.