Canada Corporate Tax Small Business Deduction Guide
A practical guide to the federal 9% small-business rate, the generally $500,000 business limit, qualifying active business income, associated corporations, passive-income and taxable-capital reductions, and provincial rates.
Important: the 9% rate does not automatically apply to all corporate income
The federal 9% rate applies to qualifying income that is eligible for the Small Business Deduction. The corporation's actual SBD amount can be limited by active business income, taxable income, the available business limit, associated corporations, passive investment income and taxable capital. CRA's T2 calculation controls.
Federal SBD Rate & Savings Estimator
This simplified calculator illustrates how the 9% federal rate can apply to qualifying income. It deliberately asks for taxable income and the estimated available business limit because the real SBD is not determined from gross "active business income" alone.
Income fits within the supplied SBD limits
Under this simplified illustration, the eligible amount is the least of active business income, taxable income and the available federal business limit.
| Qualifying amount used | $400,000.00 |
|---|---|
| Federal tax at 9% | $36,000.00 |
| Remaining active income illustrated at 15% | $0.00 |
| Simplified federal tax estimate | $36,000.00 |
| Illustrative federal-rate benefit | $24,000.00 |
What the federal SBD actually does
The Small Business Deduction reduces Part I federal corporate income tax for qualifying CCPCs. CRA calculates the deduction using 19% of the least of the relevant qualifying amounts. That deduction produces the 9% federal small-business tax rate.
9% federal rate
The federal net rate for qualifying CCPC income eligible for the SBD.
$500,000 business limit
The federal limit is generally $500,000, subject to reductions and allocations.
15% general rate
Generally applies federally to corporate income not eligible for the small-business rate.
Who can generally benefit from the SBD?
The SBD is available to qualifying CCPCs. However, incorporation alone does not guarantee a $500,000 entitlement. The corporation must have qualifying income, and several rules can reduce the available business limit.
| Factor | Why it matters |
|---|---|
| CCPC status | The corporation must satisfy the CCPC requirements and be a CCPC throughout the tax year to qualify for the SBD. |
| Active business income | The SBD generally applies to qualifying active business income carried on in Canada. |
| Associated corporations | Associated corporations generally share the federal business limit unless the applicable statutory allocation/rules provide otherwise. |
| Passive investment income | Adjusted aggregate investment income above $50,000 can reduce the federal business limit, with the reduction reaching the limit at the applicable $150,000 threshold. |
| Taxable capital | The federal business limit is reduced when the relevant taxable capital employed in Canada is above $10 million and can be eliminated at the upper statutory threshold. |
Income that may not qualify for the SBD
The phrase "active business income" should not be treated as a guarantee that every dollar qualifies. CRA identifies several categories that are generally excluded from SBD eligibility unless specific statutory exceptions apply.
Personal services business
A qualifying PSB cannot claim the SBD and is subject to special corporate tax treatment.
Specified investment business
Property-income businesses are generally excluded unless the statutory exception applies.
Specified corporate income
Certain income earned between corporations can be restricted from SBD treatment unless statutory conditions are satisfied.
Passive-income business-limit reduction
The federal SBD business limit can be reduced when the corporation and applicable associated corporations have adjusted aggregate investment income above $50,000. The rule is intended to reduce access to the small-business limit where the corporate group has significant passive investment income.
| Adjusted aggregate investment income | General federal effect |
|---|---|
| $50,000 or less | No passive-income reduction under this rule. |
| Between $50,000 and $150,000 | The federal business limit is reduced on a straight-line basis. |
| At or above the relevant $150,000 threshold | The federal business limit can be reduced to nil under the passive-income rule. |
Taxable-capital business-limit reduction
The federal business limit is also subject to a taxable capital reduction. For tax years beginning on or after April 7, 2022, the reduction applies when the relevant taxable capital employed in Canada exceeds $10 million and can eliminate the federal SBD business limit when taxable capital reaches the applicable $50 million threshold.
Federal vs provincial small-business tax
The federal 9% rate is only one component of corporate income tax. Provinces and territories impose their own corporate rates and business limits. The combined rate therefore depends on where the corporation earns income and on the applicable provincial rules.
| Jurisdiction | Federal | Provincial lower rate | Illustrative combined rate | CRA-listed business limit |
|---|---|---|---|---|
| Ontario | 9% | 3.2% | 12.2% | $500,000 |
| British Columbia | 9% | 2% | 11% | $500,000 |
| Alberta | 9% | 2% | 11% | Generally $500,000 |
These examples are not a complete Canadian rate table. Provincial rates and business limits can differ, and Alberta and Quebec administer their corporate income tax separately from CRA.
Frequently Asked Questions
Official CRA sources
Corporate tax rules are technical and can depend on the corporation's complete structure and tax year. Use the official sources below before preparing or filing a T2.
International Money Transfer & FX Rates
Sending funds for tuition, rent, or immigration fees? Retail banks sneak 2.5%–4% into exchange rates. Check today's real mid-market rate first.
Federal SBD quick facts
Before relying on the SBD
- Confirm the corporation is a CCPC for the tax year.
- Determine qualifying active business income carried on in Canada.
- Check for personal services business or specified investment business issues.
- Identify all associated corporations and business-limit allocations.
- Check adjusted aggregate investment income and the passive-income reduction.
- Check taxable capital and any other reduction that could affect the available business limit.