The small business deduction cuts the corporate tax rate on your first $500,000 of active business income roughly in half. It is not automatic. You have to be the right kind of corporation, earning the right kind of income, and not sharing the limit with companies you forgot you were associated with.
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From $563.87 taxes included
In Ontario, active business income inside the limit is taxed at 9% federally plus the Ontario small business rate. Income above the limit is taxed at 15% federally plus Ontario's general rate of 11.5% — a combined 26.5%.
Ontario's small business rate was 3.2%, giving a combined 12.2%. The 2026 Ontario budget cut it to 2.2% effective 1 July 2026, prorated for taxation years straddling that date, and the measure is now law — Bill 97, the Plan to Protect Ontario Act (Budget Measures), 2026, has received Royal Assent. The combined small business rate is therefore 11.2%. On a full $500,000 of active income, the gap between the small business rate and the general rate is over $70,000 a year.
Deferred is the right word for it. The saving is a deferral rather than a permanent win — when the money comes out to you as a dividend, personal tax largely catches up. What it buys is capital you can reinvest in the business now instead of remitting to the CRA.
Three conditions. The company must be a Canadian-controlled private corporation throughout the year — resident in Canada, not controlled by non-residents or by public corporations. The income must be active business income rather than investment income. And the corporation must not have used up its limit elsewhere.
Two categories are carved out and both catch real businesses. A specified investment business — one whose principal purpose is earning income from property, which covers most rental portfolios without a substantial number of full-time employees — does not get the deduction. Neither does a personal services business.
The personal services business rule is the one that bites incorporated contractors. If you would reasonably be regarded as an employee of the client but for the corporation, and the corporation does not employ more than a small number of full-time employees, it is a PSB: no small business deduction, an additional federal tax on top of the general rate, and almost no deductible expenses beyond your own salary. One client, their tools, their hours, their supervision is the fact pattern to avoid.
Associated corporations share a single $500,000 limit and must file an agreement allocating it between them. Association is broader than most owners expect. It can arise through a spouse's company, shares held for minor children, or an option nobody ever exercised. Two companies you consider entirely separate can still be associated for this purpose.
Large taxable capital grinds the limit. Once the associated group's taxable capital employed in Canada passes $10 million the limit reduces on a straight line and disappears at $50 million. Taxable capital is closer to total assets than to profit, so an asset-heavy business can lose the deduction while earning modestly.
Passive investment income grinds it as well. That is a separate mechanism with its own thresholds, and Ontario has not adopted it. There are also specified corporate income rules that deny the deduction on income earned from a private corporation you do not deal with at arm's length — aimed at partnership and corporate structures that were used to multiply the limit.
Only if they are not associated, and if you control all of them they almost certainly are. Associated corporations share one limit and allocate it between themselves by agreement. Structuring around association is possible in narrow circumstances, but it is a planning exercise with real anti-avoidance risk, not a filing choice you make in April.
Generally not. Rental income is usually income from property earned by a specified investment business, which is excluded. The main exception is where the corporation employs more than a small number of full-time employees in the business throughout the year, or where what looks like renting is genuinely a service business. It is a facts-and-degree question worth getting an opinion on.
It is the main risk factor for personal services business treatment. One client alone is not fatal. What matters is whether the relationship looks like employment: who controls the work, who supplies the tools, who bears the risk of profit and loss, and whether you could send a substitute. Have the contract and the working reality reviewed before the CRA does it for you.
Yes. Ontario has its own $500,000 limit running alongside the federal one. They match on the basic amount but not on every reduction — most importantly, Ontario has not adopted the federal passive investment income clawback, so a corporation can lose the federal deduction entirely and keep the Ontario one.
Open your file tonight — a licensed Ontario lawyer will confirm everything with you by tomorrow.