Canadian Tax and
Financial Information
Small Business Deduction

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Glossary  ->
Small Business  -> Small business deduction

Small Business Deduction

Income Tax Act 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 proposed to make 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 have now been included in Bill C-29 from October 25, 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.  These changes are technically now in effect, but the legislation has not yet passed so something could still change.

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.  The following table shows how the small business rate will change from 2016 to 2019 as per the 2015 Federal Budget.  See Small Business Tax Rate on the 2015 Budget website.  The Federal 2016 Budget proposes to leave the small business tax rate at 10.5%, and to leave the gross-up on non-eligible dividends at 17%, with the non-eligible dividend tax credit to remain at 10.5% of the taxable dividend.

  Will not happen
Description ITA 2015 2016 2017 2018 2019+
Part I tax s. 123(1) 38% 38% 38% 38% 38%
Federal tax abatement s. 124(1) -10% 10% -10% -10% -10%
Small business deduction s. 125(1.1) -17% -17.5% -18% -18.5% -19%
Reduced rate   11% 10.5% 10% 9.5% 9%

Eligibility for the small business deduction also depends on the amount of the corporation's taxable capital employed in Canada.  For more information see the information on the small business deduction in the Canada Revenue Agency T2 Corporation Income Tax Guide.

See also:

bulletCorporate tax rates - federal and provincial, general and small business
bullet Should you incorporate your small business?
bulletCanada Revenue Agency (CRA) information
bulletIT-73R6 Small Business Deduction
bulletT4012 - T2 Corporation Income Tax Guide - search for Small business deduction

Revised: February 08, 2017


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