It's not tax free income.  The original business income is taxed at the small business rate, then the interest earned is taxed at the small business rate, while it remains in the company, and then when it is paid out in dividends, it is taxable to the recipient.  Since corp. tax has already been paid on it, the amount of personal tax paid is less than income tax, but the personal tax + the corp tax is pretty much the same as if the same money had been paid as a salary. 
The advantage of keeping the money in the company is that less is taxed than it would be if held outside the company in a non-registered account, so the investment has more growth potential.
There's too much misinformation about this, and the tax system is too convoluted for fairness.