Preparing small business tax returns and determining deductible expenses can be complex. In Canada, businesses are subject to both federal and provincial corporate income tax. However, businesses that meet the Small Business Deduction (SBD) criteria qualify for a lower tax rate. Those that are not Canadian-controlled or exceed a certain taxable income threshold pay a higher rate.
What Qualifies as a Small Business in Canada?
A small business typically has fewer than 100 employees, but tax definitions differ. To qualify for the SBD, a business must be a Canadian-Controlled Private Corporation (CCPC). CCPCs are privately held and controlled by Canadian residents rather than public corporations or non-residents.
Businesses meeting the SBD criteria benefit from a reduced federal small business tax rate of 9%, compared to the standard 15% rate on business profits.
To qualify, a business must:
- Earn less than $50,000 in passive investment income.
- Earn less than $500,000 in active business income annually.
- Have taxable capital under $10 million.
Active income comes from primary business operations, such as selling goods or providing services. A personal service business (PSB) does not qualify, as it operates in a manner similar to an employee-employer relationship. PSBs typically derive most of their income from a single client and must maintain multiple clients and scheduling control to avoid PSB classification.
If a small business earns more than $30,000 in a quarter or a year, it must collect Harmonized Sales Tax/Goods and Services Tax (HST/GST).
Why Are Businesses Taxed?
The government applies different tax rates to small and large businesses to:
- Help small businesses become profitable before facing higher tax rates.
- Support new businesses with manageable tax costs.
- Encourage economic growth by attracting businesses to provinces.
As income grows, businesses face additional taxes, including higher payroll, corporate, and carbon taxes, particularly if they consume taxed goods such as gasoline.
Corporate Income Tax Rates in Canada
Corporate income tax rates vary by location, business size, and income sources.
Federal Corporate Tax
There are two levels of federal corporate tax rates:
- Small Business Rate (CCPCs): 9%.
- General Corporate Rate: Starts at 38%, but after federal tax abatement (10%) and general tax reduction (13%), the effective rate is 15%.
Corporate tax rates are subject to change, so businesses should check with tax authorities for updates.
Provincial Small Business Tax Rates
Provinces and territories apply their own corporate tax rates, often using the $500,000 small business deduction threshold. Saskatchewan is an exception, using a $600,000 limit.
| Province/Territory | Lower Rate | Higher Rate | |
| Ontario | 3.2% | 11.5% | |
| Québec | 9% federal + 11.5% provincial (20.5% total for first $500,000), then 27% | 3.2% if employing 5,500 annual hours | |
| British Columbia | 2% | 12% | |
| Alberta | 2% | 8% | |
| Manitoba | 0% | 12% | |
| Saskatchewan | 1% (July 1, 2023) | 12% | |
| Nova Scotia | 2.5% | 14% | |
| New Brunswick | 2.5% | 14% | |
| Newfoundland & Labrador | 3% | 15% | |
| Prince Edward Island | 1% | 16% | |
| Northwest Territories | 2% | 11.5% | |
| Yukon | 0% | 12% | |
| Nunavut | 3% | 12% | |
How to Calculate Your Small Business Tax Rate?
To determine your tax rate:
- Confirm that your business qualifies as a CCPC.
- Ensure your business income is active, not passive or PSB income.
- Verify that your taxable income is within the small business deduction limit.
If eligible, the federal tax rate is 9%. Then, add your provincial/territorial rate. For example, in British Columbia, the provincial rate is 2%, making the combined tax rate 11%.
Example Calculation:
- Taxable income: $100,000
- Combined tax rate (British Columbia): 11%
- Tax owed: $100,000 x 0.11 = $11,000
Tax Due Dates
Small business tax filings are due within six months of the fiscal year-end. For example, if your fiscal year ends on March 31, your tax return is due by September 30.
How to Reduce Your Tax Burden?
Small businesses can reduce their tax liability by claiming tax credits:
- Investment Tax Credits: For scientific research and experimental development.
- Environmental Tax Credits: For sustainability initiatives like hybrid or electric vehicles and water conservation.
- Capital Cost Allowance (CCA): For depreciation of tangible assets such as property, vehicles, and equipment.
- Input Tax Credits: To reclaim GST/HST paid on eligible expenses.
- Hiring Credits: For expanding workforce eligibility.
Need Help with Your Small Business Taxes?
Navigating small business tax rates can be overwhelming, but Webtaxonline is here to help. Our experts specialize in tax planning, corporate structuring, and compliance to maximize your tax savings. Contact us today to streamline your business taxes!
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