What is Small business deduction?

The Small Business Deduction (SBD) is a federal tax provision that reduces the corporate tax rate for Canadian-Controlled Private Corporations (CCPCs) on the first $500,000 of active business income per year.

2026 effective rates

Combined federal + provincial rates on the first $500K of active income:

• Federal: 9% (after SBD)
• Provincial small business rate: 0–3%, varying by province
• Combined: ~9–13% in most provinces

Compared to the general corporate rate of ~26.5% combined, the SBD saves roughly $65,000–$87,500 in corporate tax annually if you're earning at the $500K threshold.

Eligibility

• Must be a CCPC throughout the year
• Income must be from active business (passive investment income doesn't qualify)
• Must have less than $50M in taxable capital (full deduction phases out between $10M and $50M of capital)
• Must have less than $150K in passive investment income (deduction phases out between $50K and $150K, eliminated above)

Common loss triggers

• Holding too much passive income (interest, rents) inside the operating company
• Failing to associate with sister corporations (shared $500K limit)
• Crossing the $10M / $50M taxable capital thresholds without restructuring

Related terms