The small business deduction
This guide explains the small business deduction, the lower tax rate on active business income. It covers the $500,000 business limit, the 9 percent federal net rate and associated corporations. We prepare and file your articles of incorporation for $35.00, HST included. The government fee is separate and charged at cost: $200.00 to Corporations Canada under the CBCA, or $300.00 to the Ontario Business Registry under the OBCA. Open Corporation for $35 is a department of Gondaliya CPA. A Chartered Professional Accountant reviews this guide against Canada Revenue Agency guidance before it is published, and again after each federal budget.
What the small business deduction is
The small business deduction lowers the federal tax rate on the active business income of a Canadian-controlled private corporation. It applies up to a business limit of $500,000 a year.
The general federal rate, after the general rate reduction, is 15 percent. The deduction brings the federal rate on qualifying income down to 9 percent.
The deduction defers tax rather than removing it. Profit paid out later as a dividend is taxed again in your hands, and the dividend tax credit reflects the lower corporate rate.
Income kept inside the corporation is taxed at the lower rate until it is paid out. That deferral is the main reason an owner who earns more than they spend incorporates.
| Income | Federal rate |
|---|---|
| Active business income within the business limit | 9 percent |
| Active business income above the business limit | 15 percent |
| Investment income of a private corporation | A higher rate, part of which is refunded when taxable dividends are paid |
Ontario adds its own small business rate of 3.2 percent on income within its $500,000 limit. The combined rate in Ontario is 12.2 percent.
Tax rates and limits change with federal and Ontario budgets. These tax figures were last checked on 14 October 2026.
Who qualifies
The corporation must be a Canadian-controlled private corporation throughout the year. Control by non-residents or by a public corporation takes it outside the definition.
The income must be active business income from a business carried on in Canada. Income from a specified investment business or a personal services business does not qualify.
| Condition | What it means |
|---|---|
| Canadian-controlled private corporation | Private, and not controlled by non-residents or public corporations |
| Active business | A business other than a specified investment business or a personal services business |
| Carried on in Canada | The income comes from a business carried on in Canada |
| Within the business limit | The limit is shared by every corporation in an associated group |
The deduction is claimed on the T2 return. Our first T2 guide explains that filing.
Our $35.00 fee includes HST. Government fees are passed through at cost with no mark-up. Every figure is on our full pricing page.
Associated corporations share one limit
Corporations that are associated must share a single $500,000 business limit. They agree each year how the limit is divided among them.
Association turns on control. Two corporations controlled by the same person or group are associated, and related persons can be treated as one group.
Association can also arise through options, rights to acquire shares and shares held by minor children. These rules stop one business being split across corporations to multiply the limit.
| Situation | Associated? |
|---|---|
| One person controls both corporations | Yes |
| A holding company controls the operating company | Yes |
| Spouses each control one corporation and own shares of the other | It depends on the cross-ownership |
| Unrelated owners each control their own corporation | No, unless another association rule applies |
A holding company and its operating company are associated. Our holding company guide explains the structure.
We file your incorporation for $35.00, HST included
Government fee shown separately at cost. A CPA checks association before a second corporation is formed.
How the business limit is reduced
Two rules can reduce the business limit. One applies to large corporate groups, and the other to passive investment income.
The limit begins to fall when the associated group's taxable capital employed in Canada exceeds $10 million. It reaches zero at $50 million.
The passive income rule starts when the group's adjusted aggregate investment income exceeds $50,000. Each $1 above that reduces the limit by $5, eliminating it at $150,000.
| Rule | Measured on | Year measured |
|---|---|---|
| Taxable capital reduction | Taxable capital employed in Canada of the associated group | The previous tax year |
| Passive income reduction | Adjusted aggregate investment income of the associated group | The previous tax year |
Ontario does not apply the passive income reduction to its own small business limit. These tax figures were last checked on 14 October 2026.
Claiming the deduction
The deduction is calculated on the corporation's T2 return each year. Associated corporations each file a schedule allocating the shared business limit.
A tax year shorter than 51 weeks receives a prorated business limit. A short first year therefore gets part of the limit, not all of it.
The deduction needs no separate election. It is claimed by completing the calculation on the return, and an error there changes the tax owing for the year.
| Item | Where it goes |
|---|---|
| Small business deduction | Calculated on the T2 return |
| Related and associated corporations | Listed on Schedule 9 |
| Allocation of the business limit | Agreed on Schedule 23 |
| Short tax year | Business limit prorated by the days in the year |
The first year end decides how short the first tax year is. Our fiscal year end guide explains the choice.
What incorporating costs
The small business deduction needs a corporation, and our fee to form one is fixed. Government fees are charged at cost.
The table sets out each charge, its HST treatment and who collects it.
| Item | Amount | HST | Total | Who charges it |
|---|---|---|---|---|
| Our incorporation filing fee | $35.00 | Included | $35.00 | Open Corporation for $35 |
| Federal articles of incorporation | $200.00 | Not applicable | $200.00 | Corporations Canada |
| Ontario articles of incorporation | $300.00 | Not applicable | $300.00 | Ontario Business Registry |
Our $35.00 fee includes HST and government fees are passed through at cost with no mark-up. These figures were last checked on 7 September 2026.
What a CPA checks for the small business deduction
This guide explains the rules. It cannot tell you how much of the limit your corporation will use, because that depends on its income and its group.
Qualification is the first thing we look at. We confirm the corporation is Canadian-controlled and that its income is active business income.
Then association. We map every corporation you, your spouse and your family control, and decide how the shared limit is allocated.
Then the reductions. We track taxable capital and investment income across the group before they start to reduce the limit.
Then the first year. We check how a short first tax year prorates the limit before the year end is chosen.
Last, the return. We complete the schedules on each T2 return. The parent firm sets out the same ground in its Gondaliya CPA resources library.
Frequently asked questions
These are the questions owners ask about the small business deduction. Each answer carries the figure, the rule or the body that makes it true, so it can be read on its own.
What is the small business deduction?
What is the federal small business rate?
What is the business limit?
What are associated corporations?
Does investment income reduce the small business deduction?
Does a holding company share the business limit?
Is the business limit reduced in a short first year?
What does it cost to incorporate?
Why owners trust the filing to us
Gondaliya CPA Professional Corporation is registered with CPA Ontario under firm registration number 61330051. Our clients have left us 1,300+ five-star Google reviews, and we work from 13 Ontario offices, open 9:00 AM to 8:30 PM, Monday to Sunday. We back every filing with a 30-day money-back guarantee and a 60-day fee-matching policy, and we are a Xero Partner Award Winner 2026. Open Corporation for $35 is a department of Gondaliya CPA.
Ready to incorporate
Send the intake form and we will confirm your jurisdiction, your share structure and your year end before anything is filed. Our fee is $35.00, HST included, and the government fee is shown separately at cost. Payment is by Interac e-Transfer to info@gondaliyacpa.ca, and the security question is Not Applicable because auto-deposit is enabled.
No legal advice
Gondaliya CPA Professional Corporation is a firm of Chartered Professional Accountants licensed by CPA Ontario, firm registration number 61330051. It is not a law firm. We prepare and file corporate documents and we provide accounting and tax advice. Nothing on this page is legal advice, and reading it creates no solicitor and client relationship. For legal advice, including advice on a shareholder agreement between associated corporations, consult a lawyer licensed in the province where your corporation carries on business.
