The small business deduction is a reduction in the tax paid on Active Business Income (ABI) by a Canadian Controlled Private Corporations (CCPC’s). Note that only CCPC’s qualify for the deduction. See the Types of Corporations topic for what defines a CCPC.
Currently the small business deduction reduces the federal tax rate paid on ABI down to 11%. There is a limit on the amount of ABI that qualifies. The current limit is $500,000. Any income above the limit does not qualify.
In addition to the limit on the total qualifying income, larger corporations have a reduction in the allowable ABI. A corporation that has over $10 million in taxable capital (which is basically the assets owned by the company) in the preceding year will see their small business deduction limited. These corporations will see a reduction in the allowable income by $1 for every $10 in taxable capital over the $10 million limit, until they reach $15 million and the small business deduction is completely eliminated.
Also note that CCPC’s must share between associated companies. This is done to prevent taxpayers from simply setting up several companies to increase their allowed small business deduction.