Small Business Corporate Taxes in Canada: What Entrepreneurs Need to Know
Owning a small business in Canada is exciting, but tax obligations can often feel overwhelming. Whether you’re newly incorporated or planning to scale, understanding how small business corporate taxes work will help you avoid surprises and manage your finances with confidence.
What Is Small Business Corporate Tax in Canada?
Small business corporate tax refers to the income tax your corporation pays on its profits. When you incorporate your business, it becomes a separate legal entity that files its own tax return (T2) and pays taxes at corporate rates, which are often lower than personal tax rates.
The Canadian government offers a small business deduction to eligible Canadian-controlled private corporations (CCPCs), significantly reducing their tax rate on the first $500,000 of active business income.
How Much Do Small Businesses Pay in Corporate Taxes?
The small business corporate tax rate is composed of two parts:
-
Federal small business tax rate: 9% on the first $500,000 of active business income.
-
Provincial or territorial small business tax rate: This varies by region but generally ranges from 2% to 4% for small businesses.
For example, in Alberta, the combined small business tax rate is approximately 11% (9% federal + 2% provincial). In Ontario, it’s around 12.2%. These rates are significantly lower than the general corporate tax rates, which can exceed 26% depending on the province.
Who Qualifies for the Small Business Deduction?
Not every corporation can claim this deduction. To qualify for the small business corporate tax rate:
-
Your company must be a Canadian-controlled private corporation (CCPC).
-
It must earn active business income within Canada.
-
The taxable capital employed in Canada must be under $10 million to claim the full deduction. If it falls between $10 million and $15 million, the deduction is gradually reduced.
What Happens if My Corporation Earns More Than $500,000?
The small business tax rate applies only to the first $500,000 of active business income. Any amount above this threshold is taxed at the general corporate tax rate, which is significantly higher (25%–31% depending on province).
Many growing businesses use strategic tax planning to manage their income and avoid jumping into higher brackets unexpectedly.
Do Small Business Corporations Pay Other Taxes?
Besides corporate income tax, your business may have additional tax obligations, such as:
-
GST/HST: Required if your business earns over $30,000 annually in taxable revenues. You must collect and remit sales tax to the CRA.
-
Payroll taxes: If you pay employees, you must deduct and remit income tax, CPP, and EI.
-
Provincial payroll levies or health premiums: Depending on your province, additional employer taxes may apply.
Is It Better to Take a Salary or Dividends from My Corporation?
This is a common question among incorporated small business owners. Both have tax implications:
-
Salary: Deductible for your corporation, reduces corporate taxable income, and contributes to CPP for your retirement. You pay personal income tax at marginal rates.
-
Dividends: Paid from after-tax corporate profits. They are not deductible for the corporation but are taxed at a lower rate personally due to the dividend tax credit.
A balanced approach – paying yourself a combination of salary and dividends – often leads to optimal tax savings and CPP contributions. Consult your accountant to align this with your income needs and long-term goals.
How Can Small Businesses Reduce Their Corporate Taxes?
Here are practical ways to reduce your small business corporate taxes legally:
-
Maximize business expense deductions – include office rent, utilities, salaries, advertising, insurance, and professional fees.
-
Use income splitting by employing family members in reasonable, CRA-accepted roles.
-
Contribute to an Individual Pension Plan (IPP) if you’re an older business owner seeking larger retirement savings deductions.
-
Defer income to future years with lower expected profits where applicable.
-
Invest retained earnings strategically, avoiding passive investment income that could reduce your small business deduction eligibility.
What Is Passive Income and How Does It Affect Small Business Tax?
Passive income includes earnings like interest, rental income, or portfolio dividends not related to your active business operations. If your corporation earns over $50,000 in passive investment income annually, your access to the small business deduction is reduced, resulting in higher tax rates on active business income.
This rule was implemented to encourage businesses to reinvest earnings in operations rather than accumulate large investment portfolios within the corporation.
Why Should I Care About Small Business Corporate Taxes?
Understanding your small business corporate tax obligations is crucial because:
-
It affects your cash flow and net profits.
-
It helps you plan salary vs. dividend strategies effectively.
-
It ensures compliance and avoids penalties or interest from CRA audits.
-
It supports long-term business growth with strategic reinvestment of after-tax profits.
When Should I Consult a Tax Professional?
If you are unsure about:
-
Eligibility for the small business deduction
-
Structuring your income for tax efficiency
-
Passive income rules
-
Planning for future tax liabilities or a potential business sale
…it’s best to consult a qualified CPA or tax advisor specializing in small business corporations. Professional advice often results in savings far greater than the consulting fee.
Final Thoughts
Paying small business corporate tax is a responsibility, but it’s also a sign that your business is generating profit – a milestone to celebrate. By understanding how corporate taxes work in Canada, leveraging deductions, and planning proactively, you can minimize your tax burden and reinvest savings back into your business growth.
Stay informed, organized, and seek expert guidance when needed. Taxes don’t have to be a headache if you approach them with knowledge and strategic planning.
: