Canadian Small Business Tax Rates 2026

Federal small business rate (2026)

The federal small business tax rate is 9% on the first $500,000 of active business income for a Canadian-controlled private corporation (CCPC). This rate has been 9% since 2019 and is statutorily confirmed for 2026. The rate comes from a 19% small business deduction applied to the basic federal corporate rate of 28% (after the federal abatement on provincial income).

Above the $500,000 federal business limit, the federal general corporate rate is 15%.

Provincial and territorial small business rates (2026)

Most provinces apply a similar two-tier structure: a small business rate on the first $500,000 of active income and a general rate above. Saskatchewan extends its small business rate to $600,000 of income provincially.

“Carried forward from 2025” means the rate is the most recent published rate; that province has not yet published a 2026 rate change. Each province typically publishes its 2026 rate in its annual budget. Always confirm against the province’s budget if a calculation is for a high-stakes filing.

Ontario’s mid-2026 rate change

Ontario’s 2026 Budget reduces the small business rate from 3.2% to 2.2% effective July 1, 2026. For a calendar-year Ontario CCPC, the blended 2026 rate is approximately 2.7% (six months at 3.2% + six months at 2.2%, weighted by income earned in each half). For a fiscal year ending after July 1, 2026, the new 2.2% rate applies for the portion of the fiscal year after July 1, 2026.

Small business deduction (SBD)

The SBD is a federal corporate tax credit that reduces the federal rate on active business income from 15% to 9%. To qualify, the corporation must:

• Be a Canadian-controlled private corporation (CCPC) throughout the tax year
• Have active business income (not passive investment income)
• Have income within the business limit (federally $500,000)
• Not be a member of a partnership unless the active income is from a small business

Business limit

The federal business limit is $500,000 of active business income per CCPC per year. Two reductions apply:

• Associated corporations. If your corporation is associated with one or more CCPCs (common control or shareholding), the $500K limit is allocated among the associated group. CRA Form T2 Schedule 23 records the allocation.
• Taxable capital grind. The business limit is reduced when a corporation’s taxable capital employed in Canada exceeds $10 million, and is fully eliminated at $50 million.

Passive investment income grind

Since 2019, the federal business limit is reduced by $5 for every $1 of adjusted aggregate investment income (AAII) over $50,000 in the previous tax year. The grind is fully phased in at $150,000 of AAII — at that point, the corporation gets no SBD at all and pays the general rate on every dollar of active income.

Implication: a CCPC with significant passive investments (rental real estate, marketable securities) loses the small business rate. The grind is one of the major reasons high-passive-income CCPCs consider restructuring.

CCPC vs sole proprietor

A sole proprietor pays personal income tax on net business income at marginal rates (up to 53.5% combined federally + Ontario, in the top bracket). A CCPC pays corporate tax at 9%-12.2% combined and the owner pays personal tax only when money is paid out as salary or dividends. The deferral can be valuable when income exceeds personal needs and stays in the corporation for reinvestment.

Detailed mechanics in sole proprietor taxes in Canada.

Salary vs dividends

Once you have a CCPC, the owner pays themselves through salary, dividends, or a mix. Each option produces different total tax outcomes due to the principle of tax integration — the goal of which is that combined corporate + personal tax should equal the personal tax that would have been paid by an unincorporated owner. Integration is approximate, not exact, and varies by province and income level.

Walk-through in salary vs dividends for small business owners in Canada and the salary vs dividend calculator.

GST/HST registration

Whether you operate as a CCPC or sole proprietor, GST/HST registration is required when revenue exceeds $30,000 in any rolling four-quarter window. See when to register for GST/HST or run the GST/HST registration calculator.

Common mistakes

• Assuming all $500K of corporate income is taxed at the small business rate. The SBD only applies to active business income. Passive investment income (rental income from passive holdings, portfolio dividends, capital gains) is taxed at higher refundable rates.
• Ignoring the passive income grind. A profitable CCPC that retains earnings in marketable securities can lose the SBD entirely — often a surprise.
• Forgetting the associated-corporation rule. Two CCPCs you control together share one $500K limit, not two.
• Using the wrong province. The relevant province is where the corporation has a permanent establishment (typically the office address). For multi-province corporations, income is allocated by Form T2 Schedule 5.
• Treating Quebec and Alberta tax filings the same as other provinces. Quebec and Alberta don’t have CRA tax collection agreements — you file separate provincial corporate returns.