Ontario Small Business Deduction Explained

What is the Ontario Small Business Deduction?

The Ontario Small Business Deduction (SBD) is a tax reduction available to Canadian-Controlled Private Corporations (CCPCs) on their first $500,000 of active business income earned in Ontario. It significantly lowers the combined federal-provincial corporate tax rate, making it one of the most valuable tax benefits for small businesses.

Who Qualifies?

To be eligible for the Ontario SBD, your corporation must:

Be a Canadian-Controlled Private Corporation (CCPC) throughout the tax year
Earn active business income in Ontario
Have taxable capital employed in Canada of less than $50 million (phased out between $10M–$50M)

How Much Can You Save?

For the 2025 tax year, the combined federal and Ontario tax rate on the first $500,000 of active business income eligible for the SBD is approximately 12.2%, compared to the general corporate rate of approximately 26.5%.

| Income Type | Federal Rate | Ontario Rate | Combined | |-------------|-------------|-------------|----------| | Small Business (first $500K) | 9.0% | 3.2% | 12.2% | | General Corporate | 15.0% | 11.5% | 26.5% |

Key Considerations

Associated Corporations

If your corporation is associated with other corporations, the $500,000 business limit must be shared among all associated corporations. This is important for business owners with multiple companies.

Passive Investment Income

Excess passive investment income can reduce your access to the SBD. If your corporation earns more than $50,000 in passive investment income, the small business limit begins to be reduced, and is fully eliminated at $150,000 of passive investment income.

Tax Planning Opportunities

Salary vs. Dividend decisions — The SBD rate affects whether it's more tax-efficient to pay yourself a salary or dividends
Income splitting — Consider family members as shareholders where appropriate
Year-end planning — Time income and expenses to maximize the SBD benefit

Need Help?

Understanding how the Small Business Deduction applies to your specific situation requires professional advice. At ARG Accountax, we help Ontario business owners optimize their corporate tax structure and maximize available deductions.