What is the Small Business Tax Rate in Canada?
Published on June 29, 2022
Updated on March 10, 2025
Reviewed by
Table of Contents
What is the Small Business Deduction in Canada?
The Small Business Deduction (SBD) in Canada is a tax benefit that allows small businesses to pay a lower corporate tax rate on a portion of their active business income. It has a federal tax rate of 9% on the first CAD$500,000 of active business income then any income above this threshold is taxed at the general corporate tax rate of 15%.
Corporation tax is one of the biggest financial factors in determining whether businesses grow, remain stable, or ultimately start losing money. Most business owners in Canada cite the reduction of corporation tax rates as the largest win for their businesses.
Do I qualify as a small business in Canada?
This tax rate is applied to Canadian-controlled private corporations (CCPCs) on their active business income. Here’s how you can determine if you qualify:
- Your business must be incorporated in Canada.
- It must be privately owned, with at least 50% of voting shares controlled by Canadian residents.
- Your business must earn active business income.
- Your business maintains a taxable capital threshold under CAD$10 million.
What happens if my income exceeds CAD$500,000?
Don’t worry—if you are qualified for the small business deduction, you can still apply the 9% rate for the first CAD$500,00.
Any active business income above CAD$500,000 will then be taxed at the general corporate tax rate of 15% federally plus provincial tax.
Are there different small business tax rates in each province?
Yes, provinces and territories set their own small business tax rates, which are applied in addition to the 9% federal rate.
In this scenario, Ontario’s small business tax rate is 3.2%, so a small business in Ontario pays 12.2% total (9% federal + 3.2% provincial).
What are the provincial tax rates for the small business tax rate?
Here are the small business tax rates across different Canadian provinces and territories:
- Ontario: 3.2%
- British Columbia: 2%
- Alberta: 2%
- Quebec: 3.2%
These rates apply to eligible small businesses, typically with income up to CAD$500,000, though Quebec and Manitoba have slightly different thresholds.
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What happens if my taxable capital exceeds CAD$10 million?
If your taxable capital is between CAD$10M–$15M, the SBD will be reduced gradually. If your taxable capital exceeds CAD$15M, then your corporation no longer qualifies for the small business tax rate.
Does the small business tax rate apply to all income?
No, it only applies to the active business income of the business. Investment income, such as rental income, dividends, interest, and capital gains, is not included in the 9% tax rate and is taxed at a higher rate.
Do I still qualify if I have multiple businesses?
Yes, but there are important rules to consider. The CAD$500,000 limit applies to the entire corporation if you own multiple businesses under one corporation.
But if you own multiple corporations, the CRA may consider them “associated corporations”, meaning they must share the $500,000 small business deduction. This is done to prevent businesses from splitting income to claim multiple small business deductions.
To better maximize this deduction and other tax benefits, consider tax planning as it can help manage taxable capital to retain the small business rate.
How do I calculate my business tax?
First, you need to determine your taxable income by subtracting your expenses, credits, and exemptions from your total revenue. Once you determined your active business income, you can apply the small business tax rate for the first CAD$500,000 of your income.
If your business earns over CAD$500,000, you can apply general corporate tax on the excess. Then, add everything to see your total business tax.
What are the notable tax filing deadlines for small businesses?
Here are the deadlines for tax filing that small businesses in Canada need to adhere to:
- June 30, 2025 – Corporate Income Tax (T2)
- June 16, 2025 – Personal Income Tax (T1)
- April 30, 2025 – GST/HST Return
Are there other tax reduction strategies available for small businesses?
Yes! In addition to the Small Business Deduction (SBD) and lower small business tax rate, there are several strategies and tips for small businesses to reduce their tax liabilities. Here are some ways:
- Maximize business expenses & deductions (home office expenses, marketing & advertising costs, and business-related travel & meals)
- Take advantage of the Lifetime Capital Gains Exemption (LCGE)
- Make quarterly tax payments to avoid interest & penalties
- Incorporate your business (if you haven’t yet)
- Properly manage taxes associated with employees, such as payroll taxes, CPP, and EI.
- Take advantage of Capital Cost Allowance (CCA) for asset depreciation
- Pay yourself through dividends instead of salary so you are taxed at a lower rate.
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