The small business deduction

If your corporation is a Canadian-controlled private corporation (CCPC) for the whole tax year, the small business deduction brings the net federal tax rate on its active business income down to 9%, instead of the general rate of 15%. It applies to income up to the business limit of $500,000 a year, and provinces and territories generally have a lower rate of their own on the same income.

Who can claim it

Only a corporation that was a CCPC throughout the tax year can claim the deduction. In broad terms, a CCPC is a private corporation resident in Canada that isn’t controlled, directly or indirectly, by non-residents, by public corporations, or by any combination of them, and that has no class of shares listed on a designated stock exchange. The CRA’s page on corporation types sets out the full test. A change of corporation type can have significant tax consequences.

Which income qualifies

The deduction applies to income from an active business carried on in Canada. That generally means income from a business source, including income that’s incidental to the business. When you work out the eligible amount, you take out:

• Investment income: income from property such as interest, rents and royalties, net taxable capital gains, and dividends the corporation can deduct.
• Income from a specified investment business: a business whose main purpose is earning income from property. It can still qualify if the corporation employs more than five full-time employees in that business throughout the year.
• Income from a personal services business: where you provide services through your corporation that a client’s employee would normally do, and you (or a person related to you) own at least 10% of the issued shares of any class of the corporation or a related corporation. It can qualify if the corporation has more than five full-time employees throughout the year, or if the services go to an associated corporation. A personal services business can also deduct only a short list of expenses, mainly the pay and benefits of the person doing the work.
• Specified corporate income: some income from providing services or property to another private corporation that you, your corporation, or someone not dealing at arm’s length with you has an interest in.
• Foreign business income.

How much you can claim

The deduction is calculated on the smallest of:

1. the corporation’s active business income earned in Canada,
2. its taxable income, and
3. its business limit, after any reduction and after any part of the limit it assigns to another corporation.

The federal business limit is $500,000 for a corporation that isn’t associated with any other corporation. If the tax year is shorter than 51 weeks, you prorate the limit by the number of days in the year. Associated corporations share one business limit: they file an agreement (Schedule 23) allocating a percentage to each, and the total can’t be more than 100%.

Active business income above the limit doesn’t get the small business rate.

What shrinks the business limit

Two things can reduce the limit. The reduction that applies is the larger of the two, not both added together.

• Taxable capital. If the taxable capital employed in Canada of the corporation and its associated corporations was above a set threshold in the previous year, the limit is reduced on a straight-line basis. Large CCPCs at or above an upper threshold can’t claim the deduction at all. The thresholds are in the CRA’s T2 guide (linked in the sources).
• Passive investment income. If the adjusted aggregate investment income of the corporation and its associated corporations is above a threshold, the limit is reduced, and it drops to nil once that income passes a higher threshold. Holding investments in a corporation explains what counts.

Provincial and territorial rates

Provinces and territories generally have two rates: a lower rate on income eligible for the federal small business deduction, and a higher rate on all other income. Some use the federal business limit and others set their own. For example, in 2025 Ontario’s lower rate was 3.2% against a higher rate of 11.5%, and Saskatchewan’s business limit was $600,000.

Quebec and Alberta don’t have corporation tax collection agreements with the CRA, so the CRA’s rate table doesn’t cover them. If a rate changes during your tax year, you prorate by the number of days each rate was in effect. The corporate tax rates table shows every province and territory’s rates and limits.

A bonus: more time to pay

A CCPC that claims the small business deduction (or was allowed it the previous year), and whose taxable income last year was within its business limit, generally gets three months after year-end to pay its balance instead of two. If the corporation is associated with others, the test uses the group’s combined taxable income and business limits. See Corporate filing and payment dates.

In short

• The deduction is only for corporations that were CCPCs all year, and only on active business income earned in Canada.
• It applies to the smallest of active business income, taxable income and the business limit.
• Associated corporations share one limit, and large capital or too much passive income can shrink it.
• Provincial rates and limits vary: check the rates table for yours.