The short answer
A Canadian-controlled private corporation loses $5 of its $500,000 federal small business limit for every $1 of passive investment income above $50,000 earned the previous year, and the limit disappears entirely at $150,000. Ontario does not parallel the grind, so ground income moves from 11.2% to 17.2%, costing up to $30,000 a year.
GuideIf your corporation has retained earnings invested in GICs, bonds, stocks, or rental property, there is a rule quietly working against you: once those investments earn more than $50,000 in a year, they start raising the tax rate on your corporation's operating income. Accountants call it the SBD grind. Most incorporated physicians and dentists first hear about it the year it costs them money.
This guide explains how the grind works in 2026, with Ontario numbers throughout: what counts toward the $50,000, the prior-year timing trap that surprises almost everyone, a worked example, and the planning responses that actually move the needle.
The small business deduction (SBD) lets a Canadian-controlled private corporation (CCPC) pay a much lower tax rate on its first $500,000 of active business income each year. In Ontario, that rate is 11.2% combined as of July 1, 2026, versus 26.5% on active income above the limit.
The provincial component dropped from 3.2% to 2.2% on July 1, 2026, taking the combined small business rate from 12.2% to 11.2%. (Corporations with tax years straddling July 1 get a prorated rate for that year.) If an article quotes 12.2%, it is citing pre-July-2026 numbers.
| Small business rate (first $500K) | General rate | |
|---|---|---|
| Federal | 9.0% | 15.0% |
| Ontario | 2.2% (since July 1, 2026) | 11.5% |
| Combined | 11.2% | 26.5% |
The gap between the two rates is 15.3 percentage points, so the deduction as a whole is worth up to $76,500 per year. But the passive income grind cannot take all of it, because of an Ontario nuance most articles miss.
The passive income grind is a federal rule, and Ontario does not parallel it. When AAII grinds the federal business limit, Ontario keeps applying its own small business deduction to the full $500,000. Ground-down income therefore pays the federal general rate plus the Ontario small business rate: 15% + 2.2% = 17.2%, not the full 26.5%.
The spread the grind can cost you is 6 percentage points (17.2% minus 11.2%), which caps the damage at $30,000 per year on a fully eliminated limit. That is the real amount at stake in everything that follows. Articles quoting the full 15.3-point spread (up to $76,500) are applying the treatment of provinces that parallel the federal grind; Ontario is explicitly not one of them.
One structural note: the $500,000 limit is shared among associated corporations, meaning companies under common control. For most incorporated physicians and dentists with a single professional corporation this changes nothing, but if you and your spouse each have a corporation under common control, or you own a second company, the group shares one limit, and the group's combined passive income drives one grind.
Why it matters so much for incorporated professionals: the SBD is the engine of tax deferral. Income taxed at 11.2% leaves 88.8 cents on the dollar working inside your corporation, versus roughly 46 cents if you earned it personally at Ontario's top marginal rate. Losing the SBD doesn't eliminate the deferral, but it cuts deeply into it, and it does so precisely for the corporations that have been most successful at saving. If you're wondering what to do with those accumulated savings in the first place, start with the retained earnings mistake.
As a rule of thumb, the grind becomes relevant once your corporate portfolio approaches $1.25 million, because at a typical 4% blended yield that is where annual investment income crosses $50,000. Below that, the rule costs nothing; above it, every additional dollar of yield costs your active income five dollars of small business limit.
| Corporate portfolio | AAII at ~4% yield | Where you stand |
|---|---|---|
| $500,000 | ~$20,000 | No grind |
| $1,000,000 | ~$40,000 | Approaching: plan the next realization year |
| $1,250,000 | ~$50,000 | At the threshold: the grind starts with the next dollar |
| $2,000,000 | ~$80,000 | Grinding: federal limit down $150,000, ~$9,000/yr extra tax |
| $3,750,000 | ~$150,000 | Fully ground: federal SBD gone, up to $30,000/yr extra tax |
Two features of this table deserve emphasis. The yield assumption matters enormously: the same $2 million portfolio produces $40,000 of AAII in growth stocks with unrealized gains and $90,000+ sitting in 4.5% GICs. The composition of the portfolio, not just its size, sets the grind. And because the $50,000 threshold never inflates, ordinary portfolio growth walks every successful professional corporation toward it. This is not a rule for the exceptionally wealthy; it is the default trajectory of a career spent saving corporately.
The rule is mechanical: for every $1 of passive investment income above $50,000 your corporation (and any associated corporations) earned in the previous tax year, your $500,000 business limit shrinks by $5. At $150,000 of passive income, the limit is gone entirely, and the small business deduction with it.
The measure of passive income here is adjusted aggregate investment income (AAII). The grind is linear, which makes it easy to tabulate:
| Prior-year passive income (AAII) | Federal business limit | Extra annual tax vs. full SBD |
|---|---|---|
| $50,000 or less | $500,000 | $0 |
| $60,000 | $450,000 | $3,000 |
| $80,000 | $350,000 | $9,000 |
| $100,000 | $250,000 | $15,000 |
| $125,000 | $125,000 | $22,500 |
| $150,000 or more | $0 | $30,000 |
Extra tax assumes at least $500,000 of active business income. Ground-down income is taxed at 17.2% (federal general 15% plus Ontario small business 2.2%) instead of 11.2%, because Ontario does not apply the federal grind to its own small business deduction.
Two technical notes worth knowing. First, the $50,000 threshold is not indexed to inflation. It has been fixed since the rule took effect in 2019, so a portfolio that was comfortably under the line five years ago may be well over it today. Second, the passive income grind runs in parallel with a separate reduction for large corporations (based on taxable capital over $10 million); your limit is reduced by the greater of the two. For most professional corporations, only the passive income grind is in play.
AAII is, roughly, the investment income your corporation earns from owning things rather than doing things. The main inclusions:
And the notable exclusions:
Keep the two rate systems separate in your head: passive income is taxed on its own, from the very first dollar. The $50,000 rule is not a tax on passive income itself. It is a second cost, levied on your active income's tax rate. A full guide to what counts is coming as a companion post.
Independently of the grind, investment income inside an Ontario corporation is taxed at roughly 50.17%, from the first dollar, with no threshold. That headline rate looks brutal, but it is deliberately overstated by design: about 30.67 points of it is refundable tax, tracked in a notional account called RDTOH (refundable dividend tax on hand). When the corporation later pays taxable dividends to you, it recovers $38.33 for every $100 of dividends paid, refunding much of the upfront tax.
The system exists to remove the advantage of parking investment income in a corporation: after the refund and your personal dividend tax, the combined bill lands close to what you would have paid earning the income personally. What the corporation preserves is deferral on the principal: the 88.8 cents per dollar of active income that went in at 11.2% instead of the 46 cents that would have survived personal tax.
Three practical implications:
The full mechanics, including the split between the two RDTOH pools created in 2019, are a companion post of their own.
The grind is driven by last year's AAII, not this year's. Your corporation's 2026 business limit is set by the passive income it earned in the tax year ending in 2025. This has two practical consequences.
First, the damage is always discovered late: by the time your accountant calculates the grind, the passive income that caused it is history. A large capital gain realized in 2025, even a one-time event like rebalancing a portfolio or selling a rental property, cuts the 2026 limit no matter how ordinary 2026 itself looks.
Second, it means planning has a one-year lead time. If you want your 2027 business limit intact, the passive income to manage is 2026's. Realizing a gain "next year instead of this year" doesn't avoid the grind; it schedules it.
Dr. K's medicine professional corporation nets $600,000 of active billing income and holds a $2 million investment portfolio earning 4%, about $80,000 of AAII in interest, dividends, and realized gains.
The grind: $80,000 is $30,000 over the threshold. The federal business limit falls by 5 x $30,000 = $150,000, leaving $350,000.
The cost: $350,000 of active income is taxed at 11.2% ($39,200), and the next $150,000, which lost only its federal small business rate, is taxed at 17.2% instead of 11.2% (Ontario's 2.2% still applies), costing an extra $9,000 every year the portfolio performs as expected. The $100,000 above the original $500,000 limit is taxed at 26.5% regardless.
The trajectory is the real problem. If the portfolio compounds and reaches $3.75 million, its ~$150,000 of annual AAII eliminates the federal deduction entirely, a recurring $30,000 annual cost. The grind is not a one-time penalty; it is a permanent drag that grows with the portfolio.
What the grind does to the deferral. Before the grind, Dr. K's corporation kept 88.8 cents of every small-business-rate dollar working; on the ground-away $150,000 it now keeps 82.8 cents. That is still far better than the 46.47 cents that would survive top-bracket personal tax, so incorporation remains worthwhile, but the annual $9,000 compounds. Invested at the portfolio's own 4%, twenty years of grind costs roughly $270,000 of terminal corporate wealth. And note the feedback loop: the extra tax is paid from the corporation, but the portfolio that caused it keeps growing, deepening the grind each year unless something changes.
What Dr. K might actually do. In practice, the response is rarely one lever. A realistic combination: shift the fixed-income sleeve toward deferral-friendly structures (cutting annual AAII perhaps $15,000-$20,000), open an IPP and redirect $40,000+ of corporate savings a year into it, and move the portion of the portfolio genuinely destined for the estate into an exempt insurance policy. Together those can bring AAII back under $50,000: not by earning less, but by relocating where the earning happens.
To see your own numbers (portfolio size, yield, active income), run the passive income & SBD impact calculator. It shows the limit reduction and the dollar cost at each level of investment income, using the post-July-2026 Ontario rates.
There is no loophole that makes AAII disappear, but there are legitimate ways to change what your corporation earns, when it earns it, and in what form. In brief:
A full comparison of these strategies, with numbers, is coming as a companion post to this guide.
Usually no, though it depends on your savings rate and how much registered room you have left. For strong savers, corporate investing tends to win because the money gets into the account so much more cheaply. A dollar of active income retained at the small business rate leaves 88.8 cents to invest; paying it out as salary at Ontario's top bracket leaves about 46.5 cents to invest personally. Starting with nearly twice the capital forgives a great deal of annual tax drag, and no grind changes that arithmetic.
What the grind does change is how to invest corporately. The naive approach piles retained earnings into interest-bearing assets and portfolio dividends, maximizing both the 50.17% annual tax and the AAII count. The informed approach treats the $50,000 threshold as a design constraint: registered room first (RRSP via salary, IPP), deferral-oriented taxable investing next, and tax-exempt structures for the layer that will never be spent in your lifetime. Same savings rate, very different destination.
The honest caveat: for a professional who spends most of what they earn, or whose corporation will never accumulate seven figures, the grind is a footnote; the personal TFSA and RRSP may deserve the marginal dollar first. The threshold matters most to strong savers with long runways, which is exactly who tends to read guides like this one.
"My corporation loses everything at $50,000 of passive income." No. The $50,000 mark is where the grind starts. The deduction phases out linearly and is only fully eliminated at $150,000.
"The passive income and the 50% tax are the same problem." They are separate. Passive income is taxed at ~50.17% (partly refundable) whether you earn $10,000 or $100,000 of it. The grind is an additional cost that only bites above $50,000, and it hits your active income's rate, not the passive income itself.
"I took money out, so my passive income went down." Withdrawals don't touch AAII. Only changing what the portfolio earns, or where it earns it, moves the number.
"It's a rounding error." At full grind, $30,000 per year, every year. Invested alongside the portfolio, twenty years of full grind compounds toward $900,000 of lost corporate wealth. Smaller than the $76,500 figure circulating in articles that use the wrong provincial treatment, but not small.
If you would rather have this whole analysis run on your numbers, corporation and personal together, how that works is on the financial planning for physicians and financial planning for dentists pages.
Yes. The test applies every year: each tax year, your corporation's business limit is set using the passive investment income earned in the previous tax year. The $50,000 threshold is not indexed to inflation, so as your portfolio grows, staying under it gets harder every year.
No. Paying yourself a dividend is a distribution of after-tax corporate money and has no effect on the passive income calculation. What counts is the investment income the corporation earns (interest, taxable capital gains, portfolio dividends), not what you take out.
No. A TFSA is a personal account; a corporation cannot own or contribute to one. To use your TFSA room you must first pay yourself a salary or dividend, pay the personal tax, and contribute personally. That personal tax cost is exactly what corporate investing tries to defer, which is why the comparison is rarely simple.
Dividends from portfolio holdings, meaning corporations in which you own less than 10%, count toward the $50,000 threshold. Dividends between connected corporations (for example, from a corporation you control) generally flow tax-free and are excluded. Foreign dividends from portfolio holdings count as well.
No. Growth inside an exempt life insurance policy is tax-sheltered and does not create adjusted aggregate investment income, so it does not grind the small business deduction. That is one reason permanent insurance is a common planning response for corporations bumping against the $50,000 threshold.
