Canadian Tax and
Financial Information
Small Business Deduction

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Glossary  ->   Small Business  -> Small business deduction

Small Business Deduction

Income Tax Act (ITA) s. 125

The small business deduction is a reduction in corporate taxes for Canadian controlled private corporations, or CCPCs.  The reduced rate of tax is available on active business income up to the corporation's business limit for the year.  The federal business limit is $500,000 for 2009 and later years.  The Federal 2016 Budget made changes regarding partnerships and corporate structures which have the effect of multiplying the amount of the small business deduction.  See Small Business Taxation on the 2016 Budget website.  These changes were included in Bill C-29, which received Royal Assent December 16, 2016.

The Video Tax News team has prepared a video outlining how the proposed changes to the small business deduction are much more complicated and affect many more businesses than anyone anticipated.  If you are the owner of a small business which takes advantage of the small business deduction, it's important for you to learn more.  See also the Canadian Tax Foundation Joint Committee June 2017 submission on the Small Business Deduction Rules (pdf).

The small business corporate income tax rate is determined by subtracting the federal tax abatement and the small business deduction from the Part I tax.

On October 24, 2017, in conjunction with their Fall Economic Statement, the Department of Finance tabled a Notice of Ways and Means Motion to revise the small business deduction for 2018/19 as per the following table, and to revise the gross-up rate and dividend tax credit rate for non-eligible dividends.

Small Business Tax Rate
Description ITA 2015 2016/17 2018 2019+
Part I tax s. 123(1) 38% 38% 38% 38%
Federal tax abatement s. 124(1) -10% 10% -10% -10%
Small business deduction s. 125(1.1) -17% -17.5% -18% -19%
Reduced rate   11% 10.5% 10% 9%

Business Limit Reduction

For taxation years beginning after 2018, the reduction of the corporation's business limit will be equal to the greater of:

    (a) the reduction based on taxable capital, and

    (b) the reduction based on aggregate investment income.

Business Limit Reduction Based on Taxable Capital

Eligibility for the small business deduction also depends on the amount of the corporation's taxable capital employed in Canada.  When the taxable capital employed in Canada exceeds $10 million, the business limit of $500,000 is reduced, and is eliminated when taxable capital reaches $15 million.

The formula to calculate the business limit reduction is

$500,000 x 0.225% x (taxable capital - $10 million) / 11,250

For a CCPC which is not sharing the $500,000 business limit with any association corporations, then the reduced business limits in the following table would apply, based on taxable capital employed in Canada.

$10 million $ nil $500,000
11 million 100,000 400,000
12 million 200,000 300,000
13 million 300,000 200,000
14 million 400,000 100,000
15 million 500,000 nil

Business Limit Reduction Based on Aggregate Investment Income

The 2018 federal budget proposes to reduce the business limit when investment income earned by a CCPC exceeds $50,000.  The formula to calculate the business limit reduction will be:

5 x (aggregate investment income - $50,000)

The business limit is reduced to zero when aggregate investment income reaches $150,000.  These proposals would apply to taxation years beginning after 2018.

For a CCPC with taxable capital employed in Canada of $10 million or less, which is not sharing the business limit with any associated corporations, then the reduced business limits in the following table would apply, based on aggregate investment income.

$25,000 nil $500,000
50,000 nil 500,000
75,000 125,000 375,000
100,000 250,000 250,000
125,000 375,000 125,000
150,000 500,000 nil

Corporations with active business income less than their reduced business limit will not be affected by this change.

See also:

    - Corporate tax rates - federal and provincial, general and small business

    - Should you incorporate your small business?

Canada Revenue Agency (CRA) information:

    - IT-73R6 The Small Business Deduction (Archived)

    - T2 Corporation Income Tax Guide (T4012), other Guides, T2 return and schedules - search for Small business deduction in the T4012 Guide

Revised: February 27, 2018


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