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Small Business Deduction

2025
CCPC Details
$
$

SBD clawed back above $10M

$

SBD reduced when over $50K, eliminated at $150K

SBD Results

SBD Tax Savings

$57,200.00

Effective SBD Limit

$500,000.00

SBD Rate

12.20%

General Rate

26.50%

Effective Rate

12.20%

Tax Breakdown

SBD Eligible Portion

Income at SBD Rate$400,000.00
Federal Tax (9%)$36,000.00
Provincial Tax (3.2%)$12,800.00
Total Corporate Tax$48,800.00
After-Tax Income$351,200.00
SBD Tax Savings$57,200.00
More Information
Frequently Asked Questions
The SBD reduces the federal corporate tax rate from 15% to 9% on the first $500,000 of active business income for eligible Canadian-Controlled Private Corporations (CCPCs). Combined with provincial small business rates, the total tax rate on qualifying income ranges from 9% (Manitoba, Yukon) to 12.2% (Ontario). The SBD is one of the most significant tax advantages available to Canadian small businesses.
To claim the SBD, a corporation must be a Canadian-Controlled Private Corporation (CCPC) throughout the tax year. It must not be controlled by non-residents or public corporations, and its shares must not be listed on a designated stock exchange. The corporation must earn active business income in Canada (not passive investment income). Associated corporations must share the $500,000 SBD limit.
When a CCPC and its associated corporations have taxable capital employed in Canada exceeding $10 million, the SBD limit begins to be reduced. The reduction is linear: for every $1 of taxable capital above $10 million, the SBD limit decreases by $1 (i.e., the $500,000 limit is reduced proportionally and reaches $0 at $15 million). Taxable capital includes share capital, retained earnings, and loans/advances to the corporation.
If a CCPC's aggregate investment income (passive income including interest, rents, royalties, and taxable capital gains) exceeds $50,000, the SBD limit is reduced by $5 for every $1 of investment income above $50,000. The SBD is fully eliminated when passive income reaches $150,000. This rule, introduced in 2019, discourages CCPCs from accumulating passive investment portfolios while benefiting from the small business rate.
Income above the SBD limit is taxed at the general corporate rate. The federal general rate is 15% (after the 10% federal abatement), plus the provincial general rate. For example, in Ontario, income above $500,000 is taxed at 26.5% combined (15% federal + 11.5% provincial), compared to 12.2% on the SBD-eligible portion. Planning strategies include paying salary to reduce corporate income below the $500,000 threshold.
Associated corporations must file an agreement (Schedule 23) allocating the $500,000 SBD limit among them. If they do not file an agreement, the CRA will allocate the limit equally. Two corporations are associated if one controls the other, or both are controlled by the same person or group. The determination of association involves complex rules about voting control, equity interests, and cross-ownership. Each corporation in the group uses its allocated portion of the SBD limit.
The SBD provides tax deferral, not tax elimination. Corporate income taxed at 12.2% (Ontario) leaves more cash in the corporation than personal income taxed at up to 53.53%. However, when profits are eventually distributed as dividends, additional personal tax applies. The benefit is greatest when you can leave earnings in the corporation for reinvestment. Other benefits of incorporation include limited liability, credibility, and the lifetime capital gains exemption on qualifying small business shares ($1,016,836 for 2025).

CRA-Aligned: Uses 2025 SBD rates, taxable capital thresholds, and passive income grind rules. Associated corporation rules may affect your available SBD limit. Consult a tax professional for your specific corporate structure.

Understanding the Small Business Deduction in Canada

How the SBD reduces corporate tax for Canadian small businesses

What is the small business deduction?

The small business deduction (SBD) reduces the federal corporate tax rate from 15% to 9% on the first $500,000 of active business income earned by a Canadian-Controlled Private Corporation (CCPC). This saves up to $30,000 in federal tax per year. Most provinces also offer a reduced provincial rate on the same $500,000, bringing the combined rate to as low as 10% to 14%.

What qualifies as a CCPC?

A Canadian-Controlled Private Corporation is a private corporation that is incorporated in Canada and not controlled by non-residents or public corporations. If more than 50% of the voting shares are owned by Canadian residents, it qualifies as a CCPC. Losing CCPC status means losing access to the small business deduction and other benefits like the enhanced capital gains exemption.

What counts as active business income?

Active business income comes from the regular operations of the business — selling products, providing services, and manufacturing. It does not include passive investment income (interest, dividends, rental income from unrelated properties, or capital gains) or income from a personal services business. The distinction matters because passive income is taxed at about 50% combined.

How does the $500,000 limit work with associated corporations?

If you control multiple corporations, they are considered associated and must share the $500,000 business limit. For example, if you own two corporations, you could allocate $250,000 to each, or $400,000 to one and $100,000 to the other. The total cannot exceed $500,000 across all associated corporations.

When does the SBD start to phase out?

The SBD is reduced when the corporation's taxable capital employed in Canada exceeds $10 million. The SBD is fully eliminated at $15 million in taxable capital. It is also reduced when the corporation and its associated group earn more than $50,000 in passive investment income. Above $150,000 in passive income, the SBD is fully clawed back.

What is a personal services business?

A personal services business (PSB) is a corporation where the individual providing services would be considered an employee if not for the corporation. PSBs do not qualify for the SBD and are taxed at the general corporate rate plus an additional 5% tax. The combined rate on PSB income is about 33%. This rule targets incorporated employees who are essentially disguised contractors.

How does the SBD interact with dividend planning?

Income taxed at the SBD rate generates non-eligible dividends when paid to shareholders. These dividends receive a smaller gross-up and tax credit compared to eligible dividends from income taxed at the general rate. The combined corporate and personal tax on non-eligible dividends is designed to roughly equal the personal tax that would apply if the income were earned directly.

CRA-Aligned: Based on 2025 CRA rates and thresholds. For personal advice, speak to a qualified accountant or tax professional.

Disclaimer: This calculator provides estimates based on current CRA rates and thresholds for the 2025 tax year. It does not constitute professional tax, financial, or legal advice. Your actual liability may differ depending on your individual circumstances. Always consult a qualified accountant before making financial decisions. Read our terms

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