What you need to know about the small business deduction

Do you run a small business in Canada? You may be eligible for the small business deduction.

What is the small business deduction?

Eligible businesses can claim the 17.5% small business deduction on their first $500,000 of income, with some limitations. You can use the resulting tax savings to help your business grow.

It is important to make sure you are eligible before you claim the small business deduction. The Canada Revenue Agency (CRA) considers the specific facts of each case in order to determine eligibility, and a reassessment may be completed to disallow the small business deduction if you are not entitled to claim it.

Who can claim the deduction?

To be eligible to claim the small business deduction, you must be a Canadian-controlled private corporation carrying on a business in Canada throughout the year and meet at least one of the following conditions:

• You primarily earn active business income rather than income from a specified investment business or a personal services business
• You are a specified investment business or a personal services business that employs more than five full-time employees throughout the year.
• You are a specified investment business and you have an associated corporation that provides managerial, financial, administrative, maintenance, or other similar services to your corporation while carrying on an active business and you would have to hire more than five full-time employees to do this work if your associated corporation did not do it.

For example, you own a small storage facility and your business is a Canadian-controlled private corporation.

You cannot claim the small business deduction if your storage facility primarily earns rental income and employs less than five full-time employees throughout the year.

• You may be able to claim the small business deduction if your storage facility earns rental income with less than five full-time employees throughout the year and the business directly provides significant services that are integral to its success, such as a moving truck to transport items to the facility.

How to claim the deduction?

Corporations have to file a T2 Corporation income tax return within six months of the end of their tax year. If your corporation is located in Quebec or Alberta, you have to file a separate provincial corporation return. For more information on how to claim the small business deduction, go to Chapter 4 of the T2 Corporation – Income Tax Guide.

More information

For detailed rules about the small business deduction, see Income Tax Interpretation Bulletin IT73R6, The Small Business Deduction.