Schedule 7. Aggregate Investment Income

Schedule 7 (T2SCH7) calculates aggregate investment income, adjusted aggregate investment income (AAII), and income eligible for the small business deduction, driving the $50K–$150K passive income grind.

Federal · Updated September 23, 2026

Definition

Schedule 7 (T2SCH7), "Aggregate Investment Income and Income Eligible for the Small Business Deduction," is required for every that earns investment income or claims the . It performs two linked calculations: (1) aggregate investment income (AII), which drives refundable Part I tax and the non-eligible RDTOH addition, and (2) adjusted aggregate investment income (AAII), which reduces the SBD business limit under s.125(5.1).

AAII was introduced in 2019 to discourage passive-asset accumulation inside active-business CCPCs. For 2026 tax years, the SBD business limit is ground down $5 for every $1 of AAII above $50,000, reaching zero at $150,000 of AAII on an associated-group basis.

Key rules

Aggregate investment income (AII) under s.129(4):

Capital-gain component = eligible taxable capital gains minus eligible allowable capital losses minus prior-year net capital losses applied, with a minimum of zero AII = capital-gain component + qualifying property income minus qualifying property losses

Dividends from taxable Canadian corporations are excluded from AII (they are handled under and Part IV).

Adjusted aggregate investment income (AAII) under s.125(7) modifies AII. It removes the effect of prior-year net capital loss deductions and specified active-asset gains and losses, includes portfolio dividends that AII excludes, and has other adjustments including certain life-insurance policy income. The active-asset tests must be met; an investment is not an active asset just because an operating company owns it.

SBD grind:

SBD business limit reduction = min($500,000, 5 × max(0, AAII − $50,000)) Business limit = max(0, $500,000 − reduction)

Examples: AAII Reduction Business limit $60,000 $50,000 $450,000 $100,000 $250,000 $250,000 $150,000 $500,000 $0

The grind is applied on an associated-group basis (see ). Use the greater of the passive-income and taxable-capital reductions; do not add them. For a full-year standalone corporation with the full $500,000 limit, the table shows the passive-income reduction. Associated corporations share the limit and require the statutory allocation calculation.

Example

Apex Holdings Ltd. is a standalone CCPC with $80,000 of interest income and $30,000 of eligible taxable gains on passive assets in its 2025 calendar tax year. Assume no property losses, foreign income, dividends or other AAII adjustments. That prior-year AAII reduces its 2026 business limit. Apex remains a CCPC throughout 2026, has a full-length tax year, no taxable-capital reduction, and $350,000 of active business income and taxable income in 2026.

Aggregate investment income: Interest 80,000 Taxable capital gains 30,000 AII 110,000

Adjusted aggregate investment income: AAII (no adjustments) 110,000

SBD business limit reduction: 5 × (110,000 − 50,000) 300,000 Business limit = 500,000 − 300,000 = 200,000

Active business income of Apex is $350,000. SBD-eligible ABI = min(350,000, 200,000) = 200,000 SBD tax savings = 200,000 × (15% − 9%) = 12,000 federal Remaining 150,000 is taxed at the general 15% federal rate.

Common mistakes

Treating all dividends the same way for AAII. Dividends from connected corporations are excluded, but portfolio dividends from non-connected corporations are added to AAII even though they are left out of AII. Getting that split wrong misstates the grind and the SBD.

  • Forgetting to aggregate AAII across . A holdco with investment income can reduce an associated opco’s limit; being related and being associated are not interchangeable tests.
  • Assuming every rental business is active or every small rental business is excluded. The specified-investment-business definition includes exceptions for more than five full-time employees throughout the year and certain services supplied by an associated corporation.
  • Not netting capital losses correctly. Use the eligible capital-gain/loss component and property losses separately. The capital-gain component cannot become negative merely because losses exceed gains.
  • Confusing the AAII grind with the taxable-capital grind (s.125(5.1)(a)). The larger reduction applies; the two reductions do not stack.

Official source

CRA AII calculation and Schedule 7 guidance.

Related concepts

Sources

  • CRA Form T2SCH7
  • Income Tax Act s.125(5.1)
  • Income Tax Act s.129(4)
  • Income Tax Act s.125(7)
  • CRA Guide T4012

See also

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