Small business deduction

What the deduction does to the rate

The CRA describes a basic federal rate of 38%, which becomes 28% after the federal tax abatement. For most corporations the general reduction brings the net rate to 15%. A CCPC claiming the small business deduction pays a net federal rate of 9% on the income that qualifies.

Provinces then add their own tax. Most have a lower rate for income eligible for the federal deduction and a higher rate for everything else. Ontario’s lower rate was 3.2% and dropped to 2.2% effective July 1, 2026, while the higher rate is 11.5% and the Ontario business limit is $500,000. If a tax year straddles July 1, the CRA says to base the calculation on the number of days each rate was in effect, so a corporation with a December year-end will blend the two rates for 2026.

A simple illustration

Take an Ontario CCPC in a year when the rates above apply throughout, with $600,000 taxable income that is all active business income, and no associated corporations. The first $500,000 is taxed at roughly 9% federal plus 2.2% Ontario, or 11.2%, which is $56,000. The remaining $100,000 is taxed at roughly 15% plus 11.5%, or 26.5%, which is $26,500. The total is about $82,500. These figures are illustrative and ignore credits, refundable tax and any rate change during the year.

Who qualifies and what counts

The corporation must be a CCPC throughout the year. The deduction is based on the least of its active business income earned in Canada, its taxable income and its business limit. Income from a specified investment business, from a personal services business and certain other income is generally not eligible, so a corporation that mainly earns rent or interest, or whose income is really a disguised salary, usually does not get the lower rate.

Sharing and reducing the business limit

The $500,000 limit is prorated if the tax year is shorter than 51 weeks. Corporations that are associated in a year must share a single limit, and a CCPC can assign part of its limit to another corporation. Creating several companies does not multiply the limit, and partnership and similar structures are subject to anti-multiplication rules.

The limit is also reduced when the corporation and its associated group earn passive investment income. Once their adjusted aggregate investment income from the previous calendar year passes $50,000, the limit shrinks on a straight line and reaches nil at $150,000. As an illustration, a group with $100,000 of such income has the $500,000 limit cut by 5 times the $50,000 excess, or $250,000, leaving $250,000. A large taxable capital base can also reduce the limit.

What to discuss with your accountant

Bring a list of every corporation you or your family control, because association drives the limit. Mention investments held inside the company and any holding company. The deduction also touches timing. A CCPC that claimed it may qualify for a balance-due day three months after year-end, provided its prior-year taxable income stayed within its business limit. Quarterly instalments are a separate test that looks at taxable income, taxable capital and compliance history.