Small business tax rate in Canada: Federal and provincial guide

Published Friday 7 November 2025

Table of contents

• What qualifies as a small business in Canada?
• Small business deduction (SBD)
• What are the corporate income tax rates in Canada?
• Provincial small business tax rates
• Non-incorporated vs incorporated business taxation
• How to calculate your small business tax rate
• Tax due dates
• How to reduce your tax burden
• Get started with tax-ready accounting
• FAQs on small business tax rates in Canada

Key takeaways

• Confirm your business qualifies as a Canadian-controlled private corporation (CCPC) with less than $500,000 in active business income, less than $50,000 in passive investment income, and less than $10 million in taxable capital to access the 9% federal small business tax rate instead of the standard 15% corporate rate.

• Calculate your total small business tax rate by adding the 9% federal rate to your provincial rate, which varies significantly by location from 0% in Manitoba and Yukon to 16% in Prince Edward Island.

• File your corporate tax return within six months of your fiscal year-end and maintain separate client contracts and independent operations to avoid personal service business classification that would disqualify you from small business rates.

• Maximize tax savings by claiming available deductions such as Capital Cost Allowance on business assets, Input Tax Credits for GST/HST paid on business expenses, and Investment Tax Credits for research and development activities.

What qualifies as a small business in Canada?

Small businesses for tax purposes must be Canadian-controlled private corporations (CCPCs) to qualify for reduced tax rates. A CCPC is a corporation that's:

• controlled by Canadian residents
• not traded on public stock exchanges
• not controlled by non-residents or public corporations

This differs from the general definition of small businesses (fewer than 100 employees).

Small businesses that qualify pay only 9% federal tax instead of the standard 15% corporate rate – a significant 6% savings. The standard rate is calculated after the general tax reduction, while the small business rate applies to Canadian-controlled private corporations (CCPCs) claiming the small business deduction.

To qualify for this small business deduction (SBD), your business must meet all three criteria:

• Active business income: Less than $500,000 annually
• Passive investment income: Less than $50,000 annually
• Taxable capital: Less than $10 million

Active business income includes revenue from selling goods or providing services as part of your main business operations.

Personal service businesses (PSBs) don't qualify for the small business rate. A PSB is when:

• most income comes from one client
• the work should be done as an employee, not a contractor

To avoid PSB classification:

• maintain contracts with multiple clients
• control your own schedule
• operate independently from any single client

If your small business earns more than $30,000 in a quarter or more than $30,000 in a year, you must collect Harmonized Sales Tax (HST) or Goods and Services Tax (GST).

Small business deduction (SBD)

The small business deduction (SBD) lets eligible small businesses in Canada pay a lower federal corporate tax rate of 9% on the first $500,000 of active business income.

This reduced rate helps you keep more of your earnings to reinvest in your business, manage cash flow, and grow. To qualify, your business must be a Canadian-controlled private corporation (CCPC) and meet specific income thresholds.

What are the corporate income tax rates in Canada?

Small businesses are taxed based on their revenue. The corporate income tax rate varies in Canada based on where the business is located. It also depends on the size of the business, the types of services offered and how the business generates income.

Federal corporate tax rates are straightforward:

• Small business rate: 9% (for qualifying CCPCs)
• General corporate rate: 15% (after reductions and abatements)

The general rate calculation: 38% base rate - 10% federal abatement - 13% general reduction = 15% final rate.

Corporate tax rates can change each year. Check with your local tax authority to stay up to date.

Small businesses may also pay tax on the following types of income:

• capital gains
• passive investment income
• dividends

Federal corporate tax

The federal corporate tax rate is 15% after abatement and reduction. This rate applies to larger businesses, such as those that are publicly owned or owned by public corporations.

• They can also be Canadian-resident private companies controlled by non-residents.
• Small businesses that don't meet the SBD criteria also pay this rate of 15%.

Provincial small business tax rates

You must also pay provincial and territorial corporate tax on your business revenue. These tax rates vary by region and by the type of corporation. Most provinces use the federal small business limit of $500,000 for active business income. This limit is the first $500,000 of your business's taxable capital. Saskatchewan is the exception, with a provincial business limit of $600,000.

The tax rate can depend on your type of business, for example, manufacturing or retail.

Alberta and Québec do not have tax collection agreements with the Canada Revenue Agency (CRA), so you must file separate provincial returns if your business is in these provinces.

Here are the small business tax rates for each province:

Ontario

• Lower rate: 3.2%
• Higher rate: 11.5%

Québec

• Taxed at combined federal and provincial rates.
• The first $500,000 is at 20.5% (9% federal and 11.5% provincial), then at 27%.
• If a business employs staff for 5500 hours annually, the provincial rate drops to 3.2%.

British Columbia

• Lower rate: 2%
• General rate: 12%

Alberta

• The general corporate income tax rate is 8%. It is one of the lowest rates in Canada.
• The small business tax rate is 2%.

Manitoba

• Lower rate: 0%
• Higher rate: 12%

Saskatchewan

• Lower rate: 1% as of July 1, 2023
• Higher rate: 12%

Nova Scotia

• Lower rate: 2.5%
• Higher rate: 14%

New Brunswick

• Lower rate: 2.5%
• Higher rate: 14%

Newfoundland and Labrador

• Lower rate: 3%
• Higher rate: 15%

Prince Edward Island

• Lower rate: 1%
• Higher rate: 16%

Northwest Territories

• Lower rate: 2%
• Higher rate: 11.5%

Yukon

• Lower rate: 0%
• Higher rate: 12%

Nunavut

• Lower rate: 3%
• Higher rate: 12%

Non-incorporated vs incorporated business taxation

How your business is taxed depends on its structure. If you run a sole proprietorship or partnership, you don't pay tax separately for your business. You report your business profit or loss on your personal T1 income tax return and pay tax at your personal marginal rate.

An incorporated business is a separate legal entity. It files its own corporate T2 tax return and pays corporate income tax on its profits. Knowing the difference helps you manage your tax obligations.

How to calculate your small business tax rate

Calculating your small business tax rate combines federal and provincial rates for your total tax obligation.

Step 1: Confirm Canadian-controlled private corporation (CCPC) eligibility

• Canadian-controlled private corporation
• Meets SBD income and capital limits

Step 2: Add federal + provincial rates

• Federal: 9% (if qualified)
• Provincial: varies by location (see rates above)

Step 3: Apply to taxable income

Example: If your business in British Columbia has $100,000 in taxable income:

• Combined rate: 9% + 2% = 11%
• Total tax: $100,000 × 11% = $11,000

Tax due dates

According to the Canada Revenue Agency (CRA), small business tax returns are due within six months of your fiscal year-end.

Common examples

• Fiscal year ends December 31 → Tax due June 30
• Fiscal year ends March 31 → Tax due September 30
• Fiscal year ends any month → Tax due six months later

How to reduce your tax burden

Tax credits and deductions can help you reduce your final tax bill beyond the small business rate:

• Deduct depreciation on business assets such as equipment, vehicles and property (Capital Cost Allowance)
• Recover GST/HST paid on eligible business expenses (Input Tax Credits)
• Claim credits for scientific research and development activities (Investment Tax Credits)
• Claim deductions for sustainable practices such as electric vehicles or energy efficiency (Environmental Credits)
• Claim credits for hiring new employees, if eligible (Hiring Credits)

Input Tax Credits: Recover GST/HST paid on eligible business expenses

Investment Tax Credits: Claim credits for scientific research and development activities. Recent government proposals include increasing the expenditure limit for the enhanced investment tax credit for CCPCs from $3 million to $4.5 million.

Environmental Credits: Deductions for sustainable practices like electric vehicles or energy efficiency

Hiring Credits: Potential credits for adding new employees (eligibility varies)

Get started with tax-ready accounting

Keeping track of small business tax rates is essential for your financial planning. With clear, organized records, you can feel confident at tax time and focus on what you do best: running your business.

Xero online accounting software helps you automate tasks like tracking income and expenses, so you can prepare for tax season with confidence. See how Xero can help you stay on top of your books. Start a free trial today.

FAQs on small business tax rates in Canada

Here are answers to some common questions about small business tax rates in Canada.

What is the $500,000 small business deduction?

The small business deduction (SBD) reduces the federal corporate tax rate from 15% to 9% on the first $500,000 of active business income for eligible Canadian-controlled private corporations (CCPCs).

Do I pay tax on my small business if I'm not incorporated?

Yes. If you're a sole proprietor or in a partnership, you report your business income on your personal income tax return. You pay tax on the business's profit at your personal marginal tax rate, not the corporate tax rate.

What was the small business tax cut mentioned from 2015-2019?

Between 2015 and 2019, the federal government gradually lowered the small business tax rate from 11% down to 9%, where it currently stands for businesses that qualify for the SBD.

How often do small business tax rates change in Canada?

Federal and provincial tax rates can change each year with new government budgets. It's a good practice to check the current rates annually or work with an accountant to ensure you're using the correct figures.