The SBD 'Grind' & Corporate Investments

For Your Client

Your CPA has discussed the Small Business Deduction (SBD) reduction with you. This article explains how investment portfolio structure affects this tax mechanism over time. For tax advice and calculations specific to your corporation, consult your CPA.

What This Means for Your Corporate Investments

When your CPA discusses passive investment income thresholds, they're explaining how your corporation's investment income can affect your small business tax rate. This article focuses on the investment structure side of that conversation.

The Basic Concept:

Your corporation can earn active business income (from operations) and passive investment income (from investments). The Small Business Deduction gives you a lower tax rate on active business income:but this benefit is reduced when passive investment income exceeds $50,000.

The Investment Connection:

How you structure your corporate investment portfolio determines:

What types of income you generate (interest, dividends, capital gains)
How much passive income counts toward the threshold
How this affects your small business tax rate over time

How the Grind Works (Visual Overview)

Below $50,000 Passive Income

Small Business Deduction: Full benefit

Active business income taxed at ~12-15%

Above $50,000 Passive Income

Small Business Deduction: Reduced

For every $1 above $50,000, you lose $5 of deduction

Example:

If your corporation earns $80,000 in passive investment income:

Amount above threshold: $80,000 - $50,000 = $30,000
Reduction: $30,000 × $5 = $150,000
Your small business deduction limit is reduced by $150,000

Note: Your CPA can calculate the exact impact based on your corporation's specific situation.

What Counts as Passive Investment Income?

For investment portfolio purposes, passive income includes:

Interest income (from GICs, bonds, savings accounts)
Dividend income (from portfolio investments)
Capital gains (but only 50% counts toward the threshold)
Rental income (in most cases)

Key Insight for Portfolio Structure:

Only 50% of capital gains count toward the threshold. This is why portfolio structure matters:investments that generate capital gains create less impact on your small business deduction than investments that generate interest or dividends.

Discuss with your CPA: They can help you understand exactly what counts as passive income for your corporation and calculate your current exposure.

How Investment Structure Affects the Grind

Your investment portfolio structure determines what types of income you generate. Here's how different approaches affect the grind:

Interest-Heavy Portfolio

Generates: Interest income (100% counts toward threshold)
Impact: Higher risk of exceeding $50,000 threshold
Example: GICs, bonds, savings accounts

Dividend-Heavy Portfolio

Generates: Dividend income (100% counts toward threshold)
Impact: Higher risk of exceeding $50,000 threshold
Example: Dividend-paying stocks, dividend ETFs

Capital Gains-Focused Portfolio

Generates: Capital gains (only 50% counts toward threshold)
Impact: Lower risk of exceeding $50,000 threshold
Example: Growth-oriented investments, corporate-class funds

Mixed Portfolio

Generates: Combination of income types
Impact: Depends on the mix
Example: Balanced portfolio with various asset classes

Important: This is about structure, not avoiding investing. The goal is to understand how your portfolio structure affects tax outcomes over time.

One Example: Structure Matters

Note: This example is illustrative only. Your CPA can provide calculations specific to your corporation.

Two portfolios, same $1,000,000 value:

Portfolio A: Interest-focused

Generates $60,000 interest income per year
Passive income: $60,000 (above threshold)
Grind impact: ($60,000 - $50,000) × $5 = $50,000 reduction

Portfolio B: Capital gains-focused

Generates $60,000 capital gains per year
Passive income for grind: $60,000 × 50% = $30,000 (only half counts)
Grind impact: $0 (below threshold)

The difference: Same returns, different tax impact because of structure.

What This Means for Long-Term Planning

Over decades, small differences in tax treatment can add up. Understanding how portfolio structure affects the grind helps you:

Make informed decisions about how to invest corporate surplus
Coordinate investment strategy with your CPA's tax strategy
Optimize total wealth across corporate and personal accounts
Build flexibility to adapt as tax rules or circumstances change

This is not about avoiding corporate investing. It's about understanding how structure affects outcomes over time.

Next Steps: Coordinate with Your Team

With Your CPA:

Calculate your current passive investment income
Understand your exposure to the grind
Discuss how investment income affects your tax strategy

With Your Investment Advisor:

Review your current portfolio structure
Understand what income types you're generating
Explore options for managing the grind's impact while still growing wealth

The goal: Coordinate tax strategy (CPA) with investment structure (Investment Advisor) for long-term results.

Important Notes

Tax Advice:

This article explains investment structure concepts, not tax advice
For tax calculations and advice specific to your corporation, consult your CPA
Tax rules are complex and subject to change

Investment Considerations:

Past performance does not guarantee future results
Investment structure is one factor among many
Work with your investment advisor to understand options

Professional Coordination:

This article encourages coordination between your CPA and investment advisor
Tax strategy and investment structure work together
Your CPA remains your primary advisor for tax matters

Full Disclosure

This content is for information and education only. It explains general concepts about how investment structure affects tax mechanisms, but it is not personalized tax, legal, or investment advice.

Tax Considerations:

Tax rules are complex and subject to change
The SBD grind calculation depends on your specific corporate structure, province, and circumstances
Always consult with a qualified CPA before implementing any tax strategy
This article does not replace professional tax advice