What is the small business tax rate in Canada?
Canadian-controlled private corporations pay a reduced combined federal-provincial rate on their first $500,000 of active business income — in Ontario, roughly 12%.
Incorporated Canadian businesses pay two layers of corporate tax — federal and provincial — filed together on the T2. The small business deduction cuts the rate dramatically on your first $500,000 of active business income each year.
The numbers
The federal small business rate is 9%. Each province adds its own small business rate on top — Ontario’s is 3.2%, for a combined rate of about 12.2% on qualifying income. (Rates change with budgets; confirm the current year’s figures with your accountant.) Income above the $500,000 limit, and passive investment income, are taxed at the much higher general rates.
Who qualifies
The deduction belongs to Canadian-controlled private corporations (CCPCs) earning active business income. Two things can shrink it: sharing the $500,000 limit across associated corporations, and holding significant passive investments inside the corporation, which grinds the limit down.
Why it matters for how you pay yourself
The gap between ~12% corporate tax and your personal rate is the engine behind salary-vs-dividend planning and leaving money in the corporation to reinvest. That is a calculation, not a rule of thumb — and it changes year to year.
This is general information, not tax advice for your situation. Book a call and a Canadian accountant will give you the answer for your business.
Common questions
Does my corporation automatically get the small business rate?
If it is a Canadian-controlled private corporation earning active business income, generally yes, up to the annual limit. Associated companies share one limit, and passive income can reduce it, so structure matters.
Is dividend or investment income taxed at the small business rate?
No. Passive investment income inside a corporation is taxed at much higher rates, and enough of it starts eroding your small business deduction. Worth a planning conversation before the portfolio grows.