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 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. 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 proposed 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.
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 as per the following table, and to revise the gross-up rate and dividend tax credit rate for non-eligible dividends.
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 (link below).
- Corporate tax rates - federal and provincial, general and 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: November 01, 2017
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