Corporate tax
Small business deduction: the 9% CCPC rate, the $500,000 limit and provincial rates
The small business deduction cuts federal corporate tax to 9% on up to $500,000 of active business income for a CCPC. See how the CRA calculates it on the T2, what reduces the business limit, and a federal plus provincial rate table.
Prepared by Aldro Accounting · Updated · Sources checked
The quick answer
The small business deduction (SBD) lets a corporation that was a Canadian-controlled private corporation (CCPC) throughout the tax year reduce its Part I tax. The Canada Revenue Agency (CRA) says it is 19% of the least of active business income carried on in Canada, taxable income and the business limit, which is $500,000 for a corporation not associated with any other. It brings the net federal rate on that income to 9%, compared with the 15% general rate.
What the small business deduction does
Corporations that were CCPCs throughout the tax year may be able to claim the SBD. It reduces the Part I tax the corporation would otherwise pay.
The basic rate of Part I tax is 38% of taxable income, or 28% after the federal tax abatement. After the general tax reduction, the net federal rate is 15%. For CCPCs claiming the SBD, the net federal rate is 9%. Manufacturers of qualifying zero-emission technology have lower rates: 7.5% general and 4.5% with the SBD.
Provinces and territories generally have two rates. The lower rate applies to income eligible for the federal SBD, and the higher rate applies to all other income. Some use the federal business limit and others set their own.
Small business and general rates by province and territory
This table shows the CRA's provincial and territorial rates and business limits, with the 9% federal small business rate added to each lower rate. Quebec and Alberta aren't listed because they don't have corporation tax collection agreements with the CRA. They run their own corporate tax systems, and corporations earning income there file separate provincial returns.
Scroll sideways to see all columns.
| Province or territory | Lower rate | Combined small business rate (9% federal + lower) | Higher rate | Business limit |
|---|---|---|---|---|
| British Columbia | 2% | 11% | 12% | $500,000 |
| Manitoba | nil | 9% | 12% | $500,000 |
| New Brunswick | 2.5% | 11.5% | 14% | $500,000 |
| Newfoundland and Labrador | 2.0% (from 2.5%, effective January 1, 2026) | 11% | 15% | $500,000 |
| Northwest Territories | 2% | 11% | 11.5% | $500,000 |
| Nova Scotia | 1.5% | 10.5% | 14% | $700,000 |
| Nunavut | 3% | 12% | 12% | $500,000 |
| Ontario | 2.2% (from 3.2%, effective July 1, 2026) | 11.2% | 11.5% | $500,000 |
| Prince Edward Island | 1% | 10% | 15% (from 16%, effective July 1, 2025) | $600,000 (from $500,000, effective July 1, 2025) |
| Saskatchewan | 1% | 10% | 12% | $600,000 |
| Yukon | 0% | 9% | 12% | $500,000 |
If a rate changes during the tax year, the CRA says to base the calculation on the number of days each rate is in effect. A corporation that allocates taxable income to more than one province or territory also allocates its SBD-eligible income proportionally.
How the SBD is calculated on the T2
The CRA's T2 guide says the SBD is 19% of the least of four amounts. The result goes on line 430 of the T2.
Schedule 7 works out active business income carried on in Canada, aggregate investment income and specified partnership income. Associated CCPCs file Schedule 23 to split the business limit, and the percentages can't total more than 100%. If the tax year is shorter than 51 weeks, the business limit is prorated by the number of days in the year divided by 365.
- Line 400: income from active business carried on in Canada
- Line 405: taxable income
- Line 410: the business limit ($500,000 if not associated, or the Schedule 23 share)
- Line 428: the reduced business limit from line 426, minus any business limit assigned to another corporation under subsection 125(3.2)
What income qualifies
Income from a specified investment business or a personal services business, and certain specified corporate income, generally isn't active business income and isn't eligible.
A specified investment business is one whose principal purpose is earning income from property, such as interest, dividends, rents or royalties. Its income can still qualify if the corporation employs more than five full-time employees in the business throughout the year. A personal services business is one where an incorporated employee provides services that would otherwise make them an officer or employee of the client. That income isn't treated as personal services business income if the corporation employs more than five full-time employees throughout the year or provides the services to an associated corporation.
Specified corporate income rules generally stop the SBD on income from providing property or services to another private corporation in which the CCPC, a shareholder or a non-arm's-length person holds an interest, unless certain conditions are met. A CCPC can assign all or part of its business limit to another corporation under subsection 125(3.2). Specified farming or fishing income is excluded from specified corporate income, so it stays eligible by default.
What shrinks the $500,000 business limit
The business limit is reduced by the greater of two reductions. The larger one goes on line 422, and the reduced limit on line 426.
Taxable capital: the limit is reduced on a straight-line basis for CCPCs with taxable capital employed in Canada between $10 million and $50 million in the previous year, and CCPCs with $50 million or more don't qualify. Similar rules apply to a CCPC in an associated group with more than $10 million of taxable capital in total. For tax years starting before April 7, 2022, the range was $10 million to $15 million.
Passive income: the limit is also reduced when the CCPC and its associated corporations earn combined passive investment income of $50,000 to $150,000, and it is nil above $150,000.
Two provinces don't follow the passive income grind for their own rate. The Ontario small business limit and the New Brunswick business limit aren't subject to the federal passive income reduction, so eligible businesses there get the provincial lower rate regardless of passive income.
Filing and payment dates for a CCPC claiming the SBD
The T2 is due within six months of the end of the tax year, and for tax years starting after 2023 most corporations must file it electronically or face a $1,000 penalty.
Claiming the SBD can also move the payment date. Corporate taxes are generally due two months after year-end, but Part I, VI, VI.1 and XIII.1 tax is due three months after year-end for a CCPC that claimed the SBD for the current or previous year and whose previous-year taxable income didn't exceed its business limit. Corporations pay monthly or quarterly instalments unless the tax for the current or previous year is $3,000 or less.
Aldro prepares and files the T2, including the SBD schedules and the provincial return, for one flat yearly price that covers everything tax.
Worked example
Say a CCPC in British Columbia, not associated with any other corporation, has a full 12-month tax year, $600,000 of active business income carried on in Canada, $600,000 of taxable income, under $10 million of taxable capital and under $50,000 of passive income. The least of $600,000, $600,000 and the $500,000 business limit is $500,000, so the SBD is 19% x $500,000 = $95,000. At the net federal rates, federal tax is 9% x $500,000 = $45,000 plus 15% x $100,000 = $15,000, for $60,000. BC's rates add 2% x $500,000 = $10,000 plus 12% x $100,000 = $12,000, for $22,000. Combined: $82,000 on $600,000.
Common questions
What is the small business tax rate in Canada?
The net federal rate for a CCPC claiming the SBD is 9%, compared with 15% for other income. Provinces and territories add their own lower rate, from nil in Manitoba and 0% in Yukon to 3% in Nunavut.
What is the CCPC tax rate on income over $500,000?
Income above the business limit is taxed at the 15% net federal rate plus the provincial or territorial higher rate, for example 12% in British Columbia or 11.5% in Ontario.
Who qualifies for the small business deduction?
A corporation that was a CCPC throughout the tax year, on its income from an active business carried on in Canada. Specified investment business, personal services business and certain specified corporate income generally don't qualify.
Does passive income reduce the small business deduction?
Yes, federally. The business limit is reduced when combined passive investment income of the CCPC and its associated corporations is between $50,000 and $150,000, and is nil above that. Ontario and New Brunswick don't apply this reduction to their own limits.
Which provinces have a business limit above $500,000?
Nova Scotia ($700,000), Prince Edward Island ($600,000 since July 1, 2025) and Saskatchewan ($600,000), among the provinces whose tax the CRA collects.
The cheapest way to get your business taxes done: $399 flat.
Business tax filing is $399 CAD a year, and it covers everything tax for that year. US clients pay in USD. Canadian clients pay the same number in CAD.
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What's included
$399 a year covers everything tax for that tax year.
- Every business return for the year. All the federal and state or provincial business returns you need for the tax year: Schedule C, 1065, 1120-S, 1120 and their state returns in the US; T2, or T1 with T2125, in Canada.
- More than one state. Multi-state returns are included at the same price.
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- City and excise returns. City and local business tax returns, and state excise returns such as Washington B&O, are included in the yearly price.
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- Unfiled past years. Each unfiled prior-year return is $399 per tax year, the same flat price.
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Basic inventory tracking for online stores, such as Shopify, is included. Full cost-of-goods reconciliation is quoted separately. Payroll processing and sales-tax filing aren’t included in bookkeeping. US clients pay in USD. Canadian clients pay the same number in CAD. Our team prepares and files your return.
Sources
- CRA: T2 Corporation Income Tax Guide, chapter 4, page 4 · checked October 31, 2026
- CRA: Corporation tax rates · checked October 31, 2026
- CRA: T2 Corporation Income Tax Guide, chapter 8, page 9 · checked October 31, 2026
- CRA: Dual tax rates · checked October 31, 2026
- CRA: T2 Corporation Income Tax Guide, before you start · checked October 31, 2026
- CRA: Corporation income tax return · checked October 31, 2026
This guide explains general rules from the sources listed. It isn’t tax advice for your situation.