Corporate Tax Rates in Canada and the Small Business Deduction

In 2026, the federal corporate tax rate in Canada is 15 percent on general business income and 9 percent on the first $500,000 of active business income earned by a Canadian-controlled private corporation (CCPC) that claims the small business deduction. Each province and territory adds its own tax on top. In Ontario, the combined small business rate is 12.2 percent until June 30, 2026 and 11.2 percent from July 1, 2026, after Ontario cut its lower rate from 3.2 to 2.2 percent. The combined Ontario general rate is 26.5 percent.

The low small business rate is one of the most common reasons people incorporate. It is a real advantage, but it is also widely misunderstood as a simple way to pay less tax. This guide explains how the two corporate rates work, which corporations qualify for the lower one, what reduces the $500,000 business limit, the rates in every province and territory, and the filing and payment deadlines that come with a corporate tax return.

Corporations have two rates

A Canadian corporation is taxed at two possible rates on its active business income: a general rate, and a lower small business rate. Which one applies depends on whether the income qualifies for the small business deduction. Both the federal government and the province or territory where the corporation earns its income charge tax, so each of those two rates has a federal piece and a provincial piece.

The federal rates are built up in layers. According to the Canada Revenue Agency (CRA), the basic federal rate is 38 percent of taxable income, which falls to 28 percent after the federal tax abatement for income earned in a province or territory. The general tax reduction then brings the net federal rate to 15 percent. For a CCPC claiming the small business deduction, the net federal rate is 9 percent.

What is a Canadian-controlled private corporation?

Only a Canadian-controlled private corporation can claim the small business deduction. The CRA's definition has several technical parts, but at a general level a corporation is a CCPC at the end of its tax year if all of the following are true:

• It is a private corporation.
• It is resident in Canada and was incorporated in Canada, or has been resident in Canada since June 18, 1971.
• It is not controlled, directly or indirectly, by non-resident persons, by public corporations, or by any combination of them.
• No class of its shares is listed on a designated stock exchange.

A typical owner-managed corporation set up by Canadian residents, whether under the Canada Business Corporations Act or the Ontario Business Corporations Act, will usually meet this definition. The jurisdiction of incorporation does not change the federal rate. Ownership and control are what matter, and they can be tested in ways that are not obvious, such as through options or shareholder agreements. An accountant can confirm the status of a particular corporation. If you are still choosing a jurisdiction, our guide to federal vs provincial incorporation compares the two.

The small business deduction

The small business deduction lowers the federal tax rate to 9 percent on the first $500,000 of active business income earned by a CCPC. That $500,000 is called the business limit. Income above it is taxed at the higher general rate. Income that is not active business income, such as most investment income, does not qualify for the deduction at all, and income from a personal services business is also excluded.

The business limit belongs to a group, not to each company. Associated corporations, for example a holding company and the operating company it controls, share a single $500,000 limit. They allocate it among themselves each year on Schedule 23 of the T2 return, and the total allocated cannot exceed 100 percent. Our guide to holding companies in Canada explains how these structures are commonly set up.

When the $500,000 business limit is reduced

The $500,000 business limit is a maximum. Two federal rules can shrink it, and the larger of the two reductions applies:

• Passive investment income. If the corporation and its associated corporations together earn between $50,000 and $150,000 of adjusted aggregate investment income in the previous year, the business limit is reduced on a straight-line basis. Each dollar of that income above $50,000 reduces the limit by $5, so the limit reaches zero once passive income exceeds $150,000.
• Taxable capital. If the associated group's taxable capital employed in Canada in the previous year is between $10 million and $50 million, the business limit is reduced on a straight-line basis. At $50 million or more, the corporation cannot claim the small business deduction.

These rules matter mostly for corporations that have accumulated large investment portfolios or substantial assets. Most new and small corporations are well below both thresholds. Note that Ontario does not follow the federal passive income rule: the CRA states that the Ontario small business limit is not subject to the federal passive income business limit reduction. The taxable capital reduction does apply in Ontario.

Provincial and territorial rates

Each province and territory has a lower rate, which applies to income eligible for the small business deduction, and a higher rate for other income. Some provinces use the federal $500,000 business limit and others set their own. Where a province's limit is higher than $500,000, the federal 9 percent rate still applies only up to the federal limit. The CRA collects corporate tax for every province and territory except Quebec and Alberta, which administer their own corporate income tax.

Sources: the CRA's corporation tax rates page and its list of what is new for corporations (2026 changes for Ontario and Newfoundland and Labrador), and the Government of Alberta for Alberta. Quebec has its own small business deduction with additional conditions and is not included here. Corporations carrying on business in Quebec can find current rates on the Revenu Québec website.

Combined Ontario rates, 2026

Because the federal government and the province both tax corporate income, the rate a corporation actually pays is the two added together. For an Ontario CCPC, the 2026 figures look like this.

Ontario's reduction is prorated for a tax year that straddles July 1, 2026, so a corporation with a December 31, 2026 year-end will see a blended Ontario rate for that year. Ontario also offers a manufacturing and processing credit that can bring the Ontario rate on qualifying income down to 10 percent. Ontario corporate tax is reported on the same federal T2 return, using Ontario schedules, and the CRA collects it.

The catch: it is deferral, not a discount

The low corporate rate is not free money. When you take earnings out of the corporation to spend personally, as salary or dividends, you pay personal tax on top. The Canadian system is designed around integration, which means that, roughly, you end up in a similar place whether you earn income personally or through a corporation and pull it all out. The real benefit is timing: money left in the corporation is taxed at the low rate and can be reinvested in the business until you need it.

That is why the decision of how to pay yourself matters so much, and why salary versus dividends is its own topic. It is also why incorporating tends to make the most financial sense once a business earns more than its owner needs to live on. Our comparison of a sole proprietorship vs a corporation covers the other differences, such as limited liability and ongoing costs.

T2 filing deadline and when the tax is due

Every corporation resident in Canada must file a T2 corporation income tax return for every tax year, even if it owes no tax and even if it was inactive. The filing deadline and the payment deadline are different dates, and the payment date comes first.

• Filing deadline. The T2 return is due within six months after the end of the tax year. For a year ending on the last day of a month, it is due by the last day of the sixth month after. A March 31 year-end means a September 30 deadline, and a June 30 year-end means a December 31 deadline.
• Balance due. Generally, any tax owing is due two months after the end of the tax year.
• Three-month balance due for some CCPCs. The balance is due three months after year-end if the corporation was a CCPC throughout the year, claimed the small business deduction for the current or previous year, and its taxable income for the previous year (combined with associated corporations, if any) did not exceed its business limit.

Interest runs on any balance not paid by the balance-due date, even though the return itself is not yet late. Federal corporations and Ontario corporations also file a separate annual return under corporate law, which is a different filing from the T2. Our guide to corporate annual returns in Canada explains the difference, and Korporex can file the Ontario annual return or the federal annual return for you.

Tax instalments

Once a corporation owes more than a small amount of tax, it generally pays during the year rather than all at once after year-end. At a general level, the rules work like this:

• No instalments are required if the corporation's tax payable is $3,000 or less for either the current or the previous tax year.
• Otherwise, corporations generally pay monthly instalments, with the first one due one month less a day after the start of the tax year.
• An eligible small CCPC can pay quarterly instead. It must have a perfect compliance history and, together with associated corporations, taxable income of $500,000 or less and taxable capital employed in Canada of $10 million or less for the current or previous year.

A newly incorporated business usually has no instalments in its first year, because it has no prior year of tax payable. How much to pay later, and which calculation method to use, is a question for the corporation's accountant.

Getting set up for corporate tax

• Incorporate, federally or in Ontario. The small business deduction is only available to a corporation.
• Obtain a Business Number. A federal or Ontario corporation receives one from the CRA, and it is the account number for the corporation's T2 filings.
• Choose a fiscal year-end. It sets the six-month filing deadline and the two- or three-month payment deadline.
• Keep corporate and personal money separate, usually with a dedicated business bank account.
• Engage an accountant to prepare the T2 return and advise on salary, dividends and instalments.

For more on the second step, see our guide on how to get a CRA Business Number. Professionals such as doctors and lawyers can also access the small business rate through a regulated structure, covered in our guide to professional corporations in Canada.

Where Korporex fits

The small business rate is only available to a corporation, so accessing it starts with incorporating. Korporex files your federal or Ontario incorporation online, which is the step that makes the small business deduction available to your business. Korporex does not prepare tax returns or give tax advice; your accountant handles the T2. If you are deciding whether the move makes sense for you, our guide on how to incorporate yourself walks through the practical side.

Frequently asked questions