Active business income is the profit a corporation earns from actually running a business, and it is the income that qualifies for Canada’s small business tax rate, which is significantly lower than the general corporate rate.

The CRA distinguishes between income earned from operating a business and income earned passively, from investments, rental properties, or other sources unrelated to the business’s core activity. Only active business income qualifies for the Small Business Deduction (SBD), making the classification consequential for every incorporated Canadian business owner.

The complication arises when passive income accumulates inside the corporation. Above $50,000 of passive income annually, the SBD begins to erode, dollar for dollar, until it is eliminated entirely at $150,000. Many owners reach that threshold without realizing it because the passive income built gradually while the business grew. By the time the erosion is visible on the tax return, it has already created a cost.

The line between active and passive income inside a corporation has real tax consequences. See how Wefinx approaches tax planning.

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