Small Business Deduction
Who gets the small business deduction, what it is worth, how it shrinks, and specified corporate income.
The short version
- The small business deduction (SBD) cuts the federal tax on a Canadian-controlled private corporation's (CCPC) active business income from 15% to 9%, on up to $500,000 a year.
- Provinces have their own small business rates and limits: in Ontario, 2.2% on $500,000 since July 1, 2026 (it was 3.2%), for a combined 11.2%.
- The $500,000 business limit is shared among associated corporations.
- It shrinks when the corporation and associated corporations have taxable capital over $10 million (gone at $50 million) or more than $50,000 of passive investment income (gone at $150,000).
- It doesn't apply to investment income, personal services business income, or certain income from related private corporations (specified corporate income).
Small Business Deduction in Canada
The small business deduction is the reason incorporating appeals to profitable small businesses. On the first half million of business profit, a CCPC pays about a third of the general corporate rate. Plenty of owners know the rate; fewer know the three ways it quietly shrinks. Here's how it works and how to keep it.
Who Gets It
- A Canadian-controlled private corporation: private, Canadian-resident, and not controlled by non-residents or public corporations.
- Active business income: income from carrying on a business, not from investments (interest, most rent, dividends, capital gains).
- Not a personal services business: an incorporated worker who would otherwise be an employee of their one client doesn't qualify; see personal services business and contractor vs employee.
- Within the business limit: $500,000 a year federally, shared among associated corporations and prorated for a short tax year.
What It's Worth
| $400,000 of active business income, Ontario CCPC | With the SBD | Without (general rate) |
|---|---|---|
| Federal tax | 9% = $36,000 | 15% = $60,000 |
| Ontario tax | 2.2% = $8,800 | 11.5% = $46,000 |
| Total corporate tax | $44,800 | $106,000 |
Dividends paid from SBD income are "non-eligible" dividends (see salary vs dividends), taxed more heavily in your hands than eligible dividends, so the after-everything saving is smaller than the corporate-tax difference. It still produces a large deferral while the money stays in the company. Every province's rate is on corporate tax rates.
Is your corporation getting the full small business deduction?
Describe your corporation's income, investments, associated companies and province. The assistant checks the business limit, the passive income and taxable capital grinds, and estimates the tax.
The Three Ways It Shrinks
| Rule | How it works |
|---|---|
| Associated corporations | Related or commonly controlled corporations share one $500,000 limit, allocated among them |
| Taxable capital | The limit is reduced when the group's taxable capital employed in Canada is over $10 million and eliminated at $50 million |
| Passive investment income | The limit drops by $5 for every $1 of adjusted aggregate investment income over $50,000 in the previous year, and is eliminated at $150,000 |
The passive income rule is the one most owner-managers meet: a company that has saved $1 million or more in investments earning 5% is in the grind. Holding investments in a separate holding company doesn't avoid it if the companies are associated. Planning options include RRSPs and pensions, paying down debt, and the timing of investment gains; get advice before the grind bites.
Specified Corporate Income
Income a CCPC earns from selling to a private corporation in which it, its shareholders or related people have an interest is generally ineligible for the SBD, unless the other corporation assigns part of its business limit. This targets structures that multiply the limit, for example professionals paying their own management company.
Where It Shows on the T2
The small business deduction is calculated in the T2 return, with Schedule 23 allocating the limit among associated corporations, Schedule 7 for investment income and specified corporate income, and the province's schedule for the provincial small business rate. The T2 is due six months after year-end; see the T2 return and corporate tax deadlines. The overview is on Canadian corporate tax explained.
Thinking of incorporating to get this rate? Start with corporation vs sole proprietorship. The overall picture for small businesses is on small business taxes.
Small Business Deduction Questions
What is the small business deduction in Canada?
A reduction in federal corporate tax for Canadian-controlled private corporations, bringing the rate on up to $500,000 of active business income a year from 15% to 9%.
What is the small business tax rate in Ontario?
11.2% combined from July 1, 2026: 9% federal plus 2.2% Ontario, on up to $500,000 of active business income. Before July 1, 2026 the Ontario rate was 3.2%, and tax years that straddle the date are prorated.
Do associated corporations each get $500,000?
No. Associated corporations share one $500,000 business limit, which they allocate among themselves.
How does passive income affect the small business deduction?
The business limit is reduced by $5 for every $1 of adjusted aggregate investment income over $50,000 in the previous year, and eliminated at $150,000.
Does a holding company get the small business deduction?
Not on investment income. The deduction applies only to active business income, and associated holding and operating companies share the limit.
Sources: CRA, Corporation tax rates; T4012 T2 Corporation Income Tax Guide. Checked October 2026. Ontario's 2.2% rate is from the 2026 Ontario Budget (in force July 1, 2026). Grind thresholds are as legislated; specified corporate income and association rules are summarized and fact-specific.
Last reviewed October 5, 2026 against CRA and Government of Canada sources. How we check our facts.