How Corporate Taxes Work for Canadian Small Businesses
Canadian corporations pay income tax on their profits. Understanding how the system works helps you plan for your tax bill, take advantage of available deductions, and avoid surprises at year-end.
The Basic Concept
A corporation pays tax on its net income — revenue minus all allowable deductions. The key word is "allowable" — not all business expenses are deductible, and some have limits.
Taxable income = Revenue minus Deductible expenses
Corporate tax = Taxable income multiplied by Tax rate
Tax Rates
Canada has two levels of corporate income tax:
Federal rates
|
Income type |
Rate |
|
Small Business rate (first $500K of active business income for CCPCs) |
9% |
|
General corporate rate |
15% |
Provincial rates
Each province adds its own corporate income tax on top of the federal rate. Combined federal + provincial rates vary:
|
Province |
Small Business Rate (combined) |
General Rate (combined) |
|
Alberta |
~11% |
~23% |
|
British Columbia |
~11% |
~27% |
|
Ontario |
~12.2% |
~26.5% |
|
Quebec |
~14.2% |
~26.5% |
|
Manitoba |
~12.2% |
~27% |
|
Saskatchewan |
~9% |
~27% |
Rates may change annually — confirm current rates with your Mesa CPA advisor.
The Small Business Deduction
The Small Business Deduction (SBD) is one of the most significant tax advantages for owner-operated corporations. It reduces the federal rate from 15% to 9% on the first $500,000 of active business income earned by a Canadian-Controlled Private Corporation (CCPC).
The result: the first $500,000 in corporate profit is taxed at roughly 11–14% (combined federal + provincial), depending on the province. Profit above $500,000 is taxed at the general rate of 25–28%.
When You Pay Corporate Tax
Corporate taxes are filed and paid based on your fiscal year-end. The key deadlines:
Tax return due: 6 months after fiscal year-end (e.g., June 30 for a December 31 year-end)
Tax balance due: 2 months after fiscal year-end (e.g., February 28 for a December 31 year-end) — or 3 months if you qualify as a small CCPC and claim the SBD
If you owe instalments, those are paid throughout the year (see: When Do You Have to Pay Tax Instalments?).
What Reduces Your Corporate Tax Bill
Legitimate business deductions: Salary, rent, professional fees, advertising, interest, insurance — expenses incurred to earn business income are generally deductible.
CCA (Capital Cost Allowance): Depreciation on business assets claimed on the tax return.
The salary you pay yourself: If you pay yourself a salary, it reduces corporate taxable income (but creates personal income tax and CPP obligations for you personally).
R&D tax credits (SR&ED): If your business does qualifying research and development, there are significant federal and provincial tax credits available. Talk to your Mesa CPA advisor.
Abnormal Procedures
Your business has losses this year.
A corporation can carry non-capital losses back 3 years (to recover prior year taxes paid) or forward 20 years (to offset future profits). Your Mesa CPA advisor will determine the optimal loss application strategy.
You have passive investment income inside your corporation.
Investment income (interest, dividends, rental income from passive sources) inside a CCPC is taxed at a higher rate (~50%), with a refundable portion when dividends are paid out. This is a significant area for tax planning — high passive income can also reduce your SBD. Talk to your Mesa CPA advisor if your corporation earns investment income.
Your associated corporations share the $500K small business limit.
If you own multiple corporations, they may be associated and required to share the $500,000 SBD limit. Your Mesa CPA advisor will assess this if you have multiple incorporated entities.
FAQ
Does the corporation pay tax, or do I personally pay tax on corporate profits?
The corporation pays tax on its profits at the corporate rate. You pay personal tax only on amounts you take out of the corporation (salary, dividends). Money left in the corporation as retained earnings is taxed once at the corporate level — not again until it's distributed to you.
Is there tax on the sale of my corporation's shares?
Yes — potentially. However, if you sell qualifying small business corporation shares, the Lifetime Capital Gains Exemption (LCGE) may shelter up to ~$1.25M (2024) of the gain from tax. This is one of the most valuable tax planning opportunities for Canadian business owners. Talk to your Mesa CPA advisor well in advance of any sale.
Should I keep profits in the corporation or pay them out?
This is the core of owner-operator tax planning. Keeping profits in the corporation defers personal tax. Paying out creates personal income. The right answer depends on your personal income level, retirement plans, and the corporation's needs. Your Mesa CPA advisor models this annually.
How do I know if my company qualifies as a CCPC?
A CCPC is a Canadian corporation that is not controlled by non-residents or public companies. Most owner-operated small businesses qualify. Your Mesa CPA advisor confirms CCPC status when setting up your tax structure.