What is the corporate tax rate in Canada for small businesses?
Canadian corporations pay 15% federal corporate tax on general income, or 9% on the first $500,000 of active business income if they qualify for the Small Business Deduction. Combined federal-provincial rates typically range from 11% to 14% for small businesses and 23% to 31% for general income, depending on the province.
Detailed Explanation
Understanding corporate tax rates in Canada requires looking at two layers: the federal rate set by the Canada Revenue Agency (CRA), and the provincial or territorial rate set by each province. These two rates are added together to determine the total corporate tax you owe.
Federal corporate tax rates
The federal government sets two primary rates:
- **General federal rate: 15%** — This applies to all active business income that does not qualify for the Small Business Deduction (SBD), as well as investment income earned by a Canadian-Controlled Private Corporation (CCPC). The basic federal rate is actually 38%, but a 10% federal abatement (for income earned in a province) and a 13% general rate reduction bring the effective rate to 15%.
- **Small Business Deduction rate: 9%** — CCPCs that qualify for the SBD pay only 9% federal tax on the first $500,000 of active business income per year. This represents a significant 6-percentage-point reduction from the general 15% rate. See the separate question on the Small Business Deduction for eligibility rules.
Provincial and territorial rates
Every province and territory also charges corporate income tax. Provinces set their own small business and general rates, which vary considerably:
- Ontario: 3.2% (SBD rate) + 11.5% (general rate)
- British Columbia: 2% (SBD) + 12% (general)
- Alberta: 2% (SBD) + 8% (general)
- Quebec: 3.2% (SBD) + 11.5% (general)
- Nova Scotia: 2.5% (SBD) + 14% (general)
- Manitoba: 0% (SBD on first $500k) + 12% (general)
- Saskatchewan: 1% (SBD) + 12% (general)
Combined rates for small businesses (approximate)
Combining federal and provincial rates, qualifying CCPCs typically pay: - Ontario: 9% + 3.2% = 12.2% combined on SBD income - BC: 9% + 2% = 11% combined - Alberta: 9% + 2% = 11% combined - Manitoba: 9% + 0% = 9% combined
For general income (above the $500k SBD limit or non-CCPC corporations): - Ontario: 15% + 11.5% = 26.5% combined - BC: 15% + 12% = 27% combined - Alberta: 15% + 8% = 23% combined
What income does corporate tax apply to?
Canadian corporations pay tax on net income — revenue minus deductible business expenses. The type of income matters:
- Active business income (ABI): income from running the business. Eligible for the SBD if the corporation qualifies.
- Investment income: passive income such as interest, rent, and capital gains earned by a CCPC is taxed at a higher combined federal-provincial rate (around 50.17% in Ontario) through a refundable tax mechanism called RDTOH (Refundable Dividend Tax on Hand). Substantial passive income can also reduce the SBD limit dollar-for-dollar above $50,000.
- Capital gains: 50% of capital gains are included in taxable income (the inclusion rate). This applies to gains from selling business assets, investments, or real property.
Tax year and filing
Corporations choose their own fiscal year-end. Unlike individuals, a corporation is not required to use December 31 as its year-end. The T2 corporate tax return is due 6 months after the fiscal year-end, and any balance owing is due 2 months after year-end (3 months for eligible CCPCs).
Integration theory
Canada's tax system is designed around integration — the idea that a dollar earned inside a corporation and then paid to the owner as a dividend should result in roughly the same total tax as if the owner had earned it directly. In practice, integration is not perfect and the optimal structure depends on your province, income level, and personal tax situation.
Source: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/corporations/corporation-tax-rates.html
Real-World Examples
Ontario CCPC qualifying for SBD
A software consulting corporation in Ontario earns $400,000 active business income. It qualifies as a CCPC and has not exceeded the $500k SBD limit. Federal tax: 9% x $400,000 = $36,000. Provincial (Ontario): 3.2% x $400,000 = $12,800. Total: $48,800 (12.2%), leaving $351,200 in retained earnings.
BC corporation exceeding the SBD limit
A professional services corporation in BC earns $700,000 active business income. The first $500,000 qualifies for the SBD (11% combined rate): $55,000. The remaining $200,000 is taxed at the general rate (27% combined): $54,000. Total tax: $109,000 on $700,000 income (15.6% blended rate).
Alberta corporation at lowest combined rate
An Alberta CCPC with $300,000 active business income pays 11% combined (9% federal + 2% provincial): $33,000 total tax. Alberta's low general rate (8% provincial vs 11.5% in Ontario) is the key advantage at higher income levels above the SBD limit.
Common Mistakes to Avoid
- Assuming one corporate tax rate applies nationally — always add the federal and provincial rates together for the true combined rate.
- Forgetting that passive investment income above $50,000 per year reduces the $500,000 SBD limit dollar-for-dollar for the following year.
- Confusing the general 15% federal rate with the SBD 9% rate — the lower rate only applies to active business income for qualifying CCPCs up to the $500k limit.
- Missing the tax installment obligation — corporations with more than $3,000 in net tax owing must pay in quarterly installments rather than a lump sum at year-end.
Frequently Asked Questions
Does the 9% small business rate apply to all types of income?
No. The 9% Small Business Deduction rate applies only to active business income (income from actually running the business). Investment income such as interest, rent, and capital gains earned passively inside a CCPC is taxed at the much higher general rate, plus a refundable component through the RDTOH mechanism.
Is corporate tax paid before or after paying salaries to the owner?
Corporate tax is calculated on net income after all deductible expenses, including salaries and bonuses paid to owner-employees. A salary paid to yourself reduces the corporation's taxable income dollar-for-dollar, which is why salary planning is a key tax strategy for owner-managers.
How does Canada's corporate tax compare internationally?
Canada's combined federal-provincial rate for small businesses (roughly 9-14%) is competitive globally. The general combined rate (23-31% depending on province) is higher than the US federal 21% rate but lower than many European jurisdictions. Alberta's 23% combined general rate is among the lowest for large businesses in Canada.
Can a corporation choose its own tax year-end?
Yes. Canadian corporations can choose any 12-month fiscal year-end. Common choices include December 31 (aligns with calendar year), March 31 (end of Q1), or January 31 (one month after the holiday season). The year-end should align with natural business cycles and professional advice — it affects when tax is due and when the owner can receive salary or dividends.
Do tax rates change every year in Canada?
Federal rates are relatively stable but provinces can change their rates in annual budgets. Alberta, for example, reduced its general corporate rate from 12% to 8% between 2019 and 2020. Always confirm the current provincial rate for the year in question, as rates can shift between budget cycles.
Practical Tips
- Check your province's current corporate rates each year when budgeting — Alberta's low rate makes it a popular incorporation jurisdiction for national businesses.
- If your corporation earns passive investment income above $50,000 per year, model the SBD grind-down carefully — you may lose more in SBD savings than you earn on the investment.
- Plan year-end bonuses to owner-employees before your corporate year-end to reduce corporate taxable income — a bonus accrued in the fiscal year is deductible even if paid up to 180 days later.
- Use the CRA's T2 Corporation Internet Filing to file your return electronically — it reduces processing time and confirms receipt immediately.
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