Does Ontario have its own small business deduction for corporations?

Yes. Both the federal government and Ontario provide a small business deduction that reduces the tax rate on the "active business income" of Canadian-Controlled Private Corporations (CCPCs) up to a specified annual limit — known as the federal small business limit. Ontario's small business deduction works in conjunction with the federal deduction to lower the combined federal-provincial tax rate on eligible income significantly below the general corporate rate.

The federal small business deduction limit is set by the federal government and applies nationally. Ontario's deduction applies to income eligible for the federal deduction. The combined effective rate on small business income for an Ontario CCPC is typically much lower than the personal marginal rate for higher-income earners, which is why tax deferral through a corporation can be attractive.

Eligibility for the small business deduction requires, among other things, that the corporation be a CCPC and that the income be from an active business (not investment or passive income). Businesses with large amounts of passive investment income in the corporation may see their small business limit reduced. Discussing eligibility with a tax accountant is advisable when incorporating.