Small Business Tax Rate in Canada (2026): Federal 9%, Provincial Rates and the Passive Income Grind

Canada doesn't have one small business tax rate — it has a federal rate that every qualifying corporation shares, plus a provincial or territorial rate that depends on where the business earns its income. Both apply only to a Canadian-controlled private corporation (CCPC), only to active business income, and only up to a business limit that can shrink if the company holds a lot of investments. This guide is for owners of incorporated small businesses, people deciding whether to incorporate, and their bookkeepers. It covers the 2026 federal and provincial rates — including the 2026 cuts in Ontario, Quebec and Newfoundland and Labrador — the passive income grind, worked examples in Canadian dollars and the mistakes that cost owners the lower rate.

Quick answer

In 2026, a CCPC pays 9% federal tax on the first C$500,000 of active business income, after the small business deduction. Provinces and territories add a lower rate of 0% (nil) to 3%, so the combined rate is roughly 9% to 12%. Income above the limit is taxed at the general rate — 15% federal plus the provincial general rate.

• Ontario's lower rate fell to 2.2% on 1 July 2026; Quebec's to 2.2% for years starting after 29 April 2026

• Newfoundland and Labrador: 2% from 1 January 2026, 1.5% in 2027

• The limit shrinks when last year's passive income tops C$50,000 and is gone at C$150,000

• Associated companies share one C$500,000 limit

• Sole proprietors don't get this rate — it's for corporations only

How the 9% federal rate is built

Federal corporate income tax starts at a basic rate of 38% of taxable income. Every corporation then gets a 10-point federal abatement on income earned in a province or territory, which leaves room for provincial tax and brings the rate to 28%. Most corporations then get the 13-point general rate reduction, which produces the federal general rate of 15%.

A CCPC takes a different route. Instead of the general rate reduction, it claims the small business deduction (SBD) — a 19% reduction in Part I tax on its eligible income. Thirty-eight less 10 less 19 equals the 9% federal small business rate. The deduction is worked out on the T2 return: the CRA's T2 guide tells you to multiply the least of four amounts by 19% — active business income from Canada, taxable income, the business limit, and the business limit after any assignment to another corporation.

That "least of" test is why the business limit matters so much. A corporation with C$800,000 of active business income still gets the deduction on only C$500,000; the remaining C$300,000 is taxed at the general rate. A corporation with C$200,000 of active business income gets the deduction on C$200,000, and the unused portion of the limit doesn't carry forward.

There's one federal exception worth knowing. Manufacturers of qualifying zero-emission technology pay half the usual rates — 4.5% on small business income and 7.5% on general income — on their eligible zero-emission manufacturing income. Most small businesses won't qualify, but if you make heat pumps, solar equipment or EV components, ask your accountant.

Federal small business tax at a glance (2026)

9%

Federal small business rate

After the 19% SBD

C$500,000

Federal business limit

Per year, shared by associated corporations

15%

Federal general rate

Income above the limit

C$150,000

Passive income that wipes out the limit

Previous year's AAII

Who qualifies for the small business rate

Three conditions decide whether income gets the lower rate, and all three have to be met.

The corporation must be a CCPC throughout the tax year. A CCPC is a private corporation resident in Canada that isn't controlled, directly or indirectly, by non-residents, public corporations or a combination of them, and whose shares aren't listed on a designated stock exchange. A company owned by two Canadian residents is a CCPC. A Canadian subsidiary of a US company isn't, and pays 15% federally on every dollar. If a non-resident investor buys control part-way through the year, the company loses CCPC status for that year.

The income must be active business income earned in Canada. That means income from a business the company actively carries on — selling products, providing services, manufacturing. Two kinds of business are carved out. A specified investment business, whose main purpose is earning interest, dividends, rent or royalties, doesn't qualify unless it has more than five full-time employees. A personal services business — where the company is essentially a shell for someone who would otherwise be an employee of the client — doesn't qualify either, and is taxed at a punitive federal rate of 33% with very limited deductions. Contractors who bill one client through a personal corporation should take this risk seriously.

There must be room under the business limit. The limit is C$500,000 a year for a corporation that isn't associated with any other. It's prorated for short tax years, shared among associated corporations, and reduced by the two grinds described below. Since 2016 there's also a rule for specified corporate income: if your company earns income from services or property provided to another private corporation in which you or a related person have an interest, that income generally can't use your business limit unless the other corporation assigns some of its own limit to you.

Provincial and territorial small business rates for 2026

Every province and territory charges a lower rate on income that qualifies for the federal SBD and a higher rate on everything else. Most use the federal C$500,000 limit, but three set their own: Saskatchewan (C$600,000), Nova Scotia (C$700,000, from 1 April 2025) and Prince Edward Island (C$600,000, from 1 July 2025). The CRA collects provincial tax for every jurisdiction except Quebec and Alberta, which run their own corporate tax returns.

Combined rates add the federal 9% to the provincial lower rate. In a province with a higher limit than Ottawa's, income between C$500,000 and the provincial limit gets the provincial lower rate but the federal general rate of 15%.

Where a corporation has a permanent establishment in more than one province, its taxable income is split between provinces using a formula based on salaries and gross revenue, and each province's rate applies to its share.

What changed in 2026: Ontario, Quebec and Newfoundland and Labrador

The CRA's rate page was last updated in May 2025, so several 2026 changes aren't on it yet. Three provinces cut their small business rates this year, and each one starts differently.

Ontario — 2.2% from 1 July 2026. The 2026 Ontario Budget raised the Ontario small business deduction so that the lower rate drops from 3.2% to 2.2%. The change is law: Schedule 15 of Bill 97 amended the Taxation Act, 2007, and the bill received Royal Assent as chapter 2 of the Statutes of Ontario, 2026. The new rate applies to the days of a tax year after 30 June 2026, so a company with a 31 December year-end pays a blended rate for 2026 and the full 2.2% from 2027. The Ontario business limit stays at C$500,000. To keep the tax system balanced, Ontario also plans to lower its dividend tax credit on non-eligible dividends from 1 January 2027, so owners who pay themselves dividends will pay slightly more personal tax on them.

Quebec — 2.2% for taxation years starting after 29 April 2026. Quebec's Information Bulletin 2026-3 raises its maximum small business deduction from 8.3 to 9.3 points, which cuts the minimum rate on SBD income from 3.2% to 2.2%. Unlike Ontario's, Quebec's change isn't prorated. It applies only to taxation years that begin after the bulletin was published on 29 April 2026. A company with a calendar year-end won't see the lower rate until its tax year starting 1 January 2027. Quebec's other conditions are unchanged: to get the full deduction, a corporation needs at least 5,500 hours of employee remunerated hours (in the current year, or with associated corporations in the previous year), or at least half of its activities in the primary and manufacturing sectors. The deduction phases out between 5,500 and 5,000 hours, so a one-person consulting company in Montreal usually doesn't get the Quebec small business rate at all.

Newfoundland and Labrador — a three-year phase-down. The province's 2026 budget, tabled on 29 April 2026, cut the small business rate from 2.5% to 2% retroactive to 1 January 2026, with further cuts to 1.5% on 1 January 2027 and 1% on 1 January 2028. The general rate of 15% and the C$500,000 limit are unchanged.

The other provinces didn't change their small business rates in their 2026 budgets. The most recent earlier moves were Nova Scotia's cut to 1.5% with a C$700,000 limit from April 2025, and Prince Edward Island's C$600,000 limit and 15% general rate from July 2025.

Small business rate changes to watch

1 Jan 2026

Newfoundland and Labrador lower rate falls to 2% (retroactive)

29 Apr 2026

Quebec Bulletin 2026-3 — 2.2% for taxation years starting after this date

1 Jul 2026

Ontario lower rate falls to 2.2%, prorated by days

1 Jan 2027

Ontario and Quebec reduce non-eligible dividend tax credits; NL rate 1.5%

1 Jan 2028

NL rate scheduled to reach 1%

The passive income grind and the taxable capital grind

Two rules shrink the C$500,000 business limit for bigger or investment-heavy companies. The reduction is the greater of the two, not the total.

Passive income. If the corporation and its associated corporations together earned more than C$50,000 of adjusted aggregate investment income (AAII) in the tax year that ended in the previous calendar year, the business limit is reduced by C$5 for every dollar over C$50,000. At C$150,000 of AAII the limit is nil. AAII broadly means interest, rent, portfolio dividends and taxable capital gains from investments; it excludes gains on assets used in an active business and dividends from connected corporations. The rule has applied to tax years starting after 2018 and is calculated on Schedule 7.

Taxable capital. If the associated group's taxable capital employed in Canada in the previous year was more than C$10 million, the limit is reduced on a straight line until it disappears at C$50 million. Before April 2022 the upper end was C$15 million, so the 2022 change brought many mid-sized family businesses back into the SBD.

Because both grinds look at the previous year, a large one-off gain this year doesn't reduce this year's limit — it reduces next year's. That timing matters when you sell an investment property or a portfolio held in the company.

The provinces mostly follow the federal grinds, but Ontario and New Brunswick don't apply the passive income grind to their own small business limits. The Ontario government says plainly that it doesn't parallel the federal measure. In those two provinces, a company that loses its federal SBD to investment income can still pay the provincial lower rate on its active income.

Worked examples in C$

These examples use the 2026 rates above and assume each corporation is a CCPC with no associated companies unless stated.

Working out your small business tax

1. 1

   Confirm CCPC status for the whole year

   Check who controls the company and whether that changed during the year.

2. 2

   Separate active business income from investment income

   Sales and service income go in one bucket; interest, rent, portfolio dividends and investment gains in the other.

3. 3

   Work out your business limit

   Start at C$500,000, share it with associated companies, then apply the greater of the passive income and taxable capital grinds from last year's figures.

4. 4

   Apply the federal and provincial rates

   9% federal plus the provincial lower rate up to the limit; 15% plus the provincial general rate above it.

5. 5

   Check the provincial limit separately

   Saskatchewan, Nova Scotia and PEI have higher limits; Ontario and New Brunswick ignore the passive income grind.

1. An Ontario contractor with a December year-end. A Hamilton renovation company earns C$400,000 of active business income in calendar 2026. Federal tax: 9% × C$400,000 = C$36,000. Ontario prorates by days: 181 days (1 January to 30 June) at 3.2% and 184 days at 2.2% give a blended Ontario rate of about 2.696%, or C$10,784. Total: about C$46,784. In 2027, with a full year at 2.2%, the same profit would cost C$36,000 + C$8,800 = C$44,800.

2. An Alberta company above the limit. A Calgary engineering firm earns C$700,000 of active business income. The first C$500,000 is taxed at 9% + 2% = 11%, or C$55,000. The remaining C$200,000 is taxed at 15% + 8% = 23%, or C$46,000. Total: C$101,000, an average rate of about 14.4%.

3. A Nova Scotia company inside the provincial limit. A Halifax software company earns C$650,000. Federally, C$500,000 is taxed at 9% (C$45,000) and C$150,000 at 15% (C$22,500). Nova Scotia's C$700,000 limit covers all C$650,000 at 1.5% (C$9,750). Total: C$77,250.

4. The passive income grind in British Columbia. A Vancouver dental corporation earns C$450,000 of active business income in 2026. In 2025 it earned C$90,000 of AAII from an investment portfolio held in the company. Its business limit falls by 5 × (C$90,000 − C$50,000) = C$200,000, to C$300,000. Federal tax: C$300,000 × 9% + C$150,000 × 15% = C$27,000 + C$22,500 = C$49,500. BC follows the grind: C$300,000 × 2% + C$150,000 × 12% = C$6,000 + C$18,000 = C$24,000. Total on active income: C$73,500, compared with C$49,500 if it had kept its full limit — a C$24,000 cost.

5. The same company in Ontario. Move the practice to Ottawa for its 2027 year. The federal result is the same — C$49,500 — but Ontario doesn't apply the passive grind, so all C$450,000 gets the 2.2% Ontario rate: C$9,900. Total: C$59,400, about C$14,100 less than in BC.

The investment income itself is taxed separately at higher rates, part of which is refundable when the company pays taxable dividends. That's outside the scope of these examples, but it's why advisers often move surplus investments into a holding structure or an individual pension plan rather than leaving them in the operating company.

What the lower rate means for owners

The small business rate is a deferral, not a permanent saving. Canada's tax system is designed so that income taxed at the small business rate in a corporation and then paid out as a dividend ends up taxed at roughly the same total as if the owner had earned it personally. Dividends paid from income that got the SBD are non-eligible dividends, which carry a smaller dividend tax credit than eligible dividends paid from income taxed at the general rate. That's why Ontario and Quebec both reduced their non-eligible dividend tax credits alongside their 2026 rate cuts.

The real benefit is the gap between the small business rate and your personal marginal rate on profit you leave in the company — to buy equipment, fund working capital, pay down business debt or build a cushion. An owner in a 43% personal bracket who leaves C$200,000 in an Ontario company pays about C$22,400 in corporate tax on it in 2027, instead of roughly C$86,000 personally, and keeps the difference working in the business until it's paid out.

Salary works differently. Wages paid to the owner are deductible to the company, so they reduce the income taxed at the small business rate, and the owner pays personal tax and CPP contributions on them. Many owners use a mix: enough salary to create RRSP room and CPP entitlement, with the rest left in the company or paid as dividends. Our payroll deductions guide covers what you withhold on salary, and T4 slips explains the year-end reporting.

Filing and paying

The corporation reports its income on the T2 Corporation Income Tax Return, with Schedule 7 for active business income and the passive income grind and Schedule 23 if it has associated corporations. Alberta corporations also file an Alberta return, and Quebec corporations file with Revenu Québec.

The return is due six months after the end of the tax year, but the balance of tax is due earlier: two months after year-end for most corporations, or three months for a CCPC that claims the small business deduction in the current or previous year and whose associated group's taxable income in the previous year didn't exceed its business limit. Interest runs from the balance-due day, not the filing date. If the corporation's tax for the current or previous year exceeds C$3,000, it must also pay instalments — monthly as a rule, or quarterly for small CCPCs that meet the CRA's conditions on income, capital and compliance history. You can see balances and make payments through My Business Account.

Year-end checklist for the small business deduction

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• Confirm the company was a CCPC for the entire tax year
• List every associated corporation and agree the Schedule 23 allocation
• Total last year's AAII for the whole associated group
• Check taxable capital employed in Canada against the C$10 million floor
• Identify any income from other private corporations you or relatives own (specified corporate income)
• For Ontario, prorate 2026 years that straddle 1 July 2026
• For Quebec, check employee remunerated hours and when your taxation year started
• Diary the balance-due day — two or three months after year-end

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Common mistakes

• Treating the limit as per company. Associated corporations share one C$500,000. Setting up a second company for a new line of business doesn't give you a second limit.
• Forgetting the grinds look back a year. A big investment gain in 2026 can wipe out your 2027 small business deduction. Plan the timing of sales inside the company.
• Using an out-of-date Ontario or Quebec rate. Many calculators still show 3.2%. Ontario prorates by days from 1 July 2026; Quebec applies the new rate only to years starting after 29 April 2026.
• Assuming a personal services business is safe. If your corporation does work that looks like employment for a single client, the CRA can deny the SBD and apply the 33% federal rate.
• Holding rental property in the operating company. Rent from a small rental business is usually investment income, not active business income, and it counts towards AAII.
• Missing the earlier payment date. Filing on time doesn't stop arrears interest if the tax was due two or three months after year-end.

Official links

• CRA — Corporation tax ratesFederal and provincial rates and business limits
• CRA — T2 guide, small business deduction (line 430)How the SBD, business limit and grinds are calculated
• Ontario — Corporate income taxOntario rates, 1 July 2026 cut, passive income treatment
• Québec — Information Bulletin 2026-3Quebec SBD increase and conditions
• Newfoundland and Labrador — Budget 2026 tax measures2026–2028 small business rate schedule

Next steps

Pull your last T2 and check three things: the associated-group allocation, last year's AAII and the provincial rate your software used for 2026. If you're still deciding whether to incorporate, our guide to incorporating in Canada covers the set-up costs, and the break-even calculator helps you see how much profit the business needs before the lower corporate rate outweighs the extra accounting and filing work.

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

What is the small business tax rate in Canada for 2026?

A Canadian-controlled private corporation pays 9% federal tax on up to C$500,000 of active business income a year, thanks to the small business deduction. The province or territory adds its own lower rate, from 0% (nil) in Manitoba to 3% in Nunavut, so combined rates run from about 9% to 12%. Income above the limit is taxed at the general rate, 15% federally plus the provincial general rate.

Did Ontario lower its small business tax rate in 2026?

Yes. Ontario's lower rate fell from 3.2% to 2.2% on 1 July 2026, under the budget bill that received Royal Assent as chapter 2 of the Statutes of Ontario, 2026. A corporation whose tax year straddles that date prorates the two rates by days. With the federal 9%, the combined rate is now 11.2% on the first C$500,000.

How does passive income reduce the small business deduction?

If a corporation and its associated corporations earned more than C$50,000 of adjusted aggregate investment income in the previous tax year, the federal C$500,000 business limit drops by C$5 for every dollar over that amount. It reaches nil at C$150,000. Ontario and New Brunswick don't copy this rule for their own provincial limits, so the provincial small business rate survives there.

Do sole proprietors get the small business tax rate?

No. The small business deduction is only available to corporations that were Canadian-controlled private corporations throughout the tax year. A sole proprietor's business profit is added to their personal income and taxed at graduated personal rates, plus CPP contributions on self-employment earnings. Incorporating gives access to the lower rate on profit you leave in the company, but tax is due again when you pay it out as salary or dividends.

Is the small business limit shared between companies I own?

Yes. Associated corporations — broadly, companies controlled by the same person or group — share one C$500,000 federal business limit. They allocate it on Schedule 23 of the T2 return, and the total can't exceed 100%. Creating extra companies doesn't multiply the limit, and the CRA's association rules look through family members and trusts.

When is corporate tax due for a small business?

The T2 return is due six months after the tax year ends, but the tax itself is due sooner: generally two months after year-end, or three months for a CCPC that claims the small business deduction and whose associated group's taxable income for the previous year was within its business limit. If tax owing exceeds C$3,000, you also pay instalments during the year.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 9 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.Corporation tax rates — Canada Revenue Agency · accessed 9 October 2026
2. 2.T4012 T2 Corporation Income Tax Guide — Chapter 4, page 4 (small business deduction) — Canada Revenue Agency · accessed 9 October 2026
3. 3.Corporate income tax — Government of Ontario · accessed 9 October 2026
4. 4.Bill 97, Plan to Protect Ontario Act (Budget Measures), 2026 — Schedule 15 — Legislative Assembly of Ontario · accessed 9 October 2026
5. 5.Information Bulletin 2026-3 — Increase in the small business deduction rate — Québec Ministère des Finances · accessed 9 October 2026
6. 6.Budget 2026 — A Plan for Lower Taxes — Government of Newfoundland and Labrador · accessed 9 October 2026
7. 7.Alberta tax overview — Government of Alberta · accessed 9 October 2026
8. 8.2026 Tax deadlines for Canadian businesses and self-employed individuals — Government of Canada · accessed 9 October 2026
9. 9.2026 Corporate Income Tax Rates — TaxTips.ca · accessed 9 October 2026
10. 10.Small business income thresholds for 2026 and beyond — KPMG Canada · accessed 9 October 2026