As a small business owner in Ontario, understanding the Ontario Small Business Deduction (SBD) can lead to significant tax savings. This deduction reduces the provincial corporate income tax rate on eligible income, allowing businesses to reinvest more into growth.
What Is the Ontario Small Business Deduction?
The SBD allows Canadian-controlled private corporations (CCPCs) to benefit from a reduced Ontario corporate tax rate on the first $500,000 of active business income. Specifically, it lowers the provincial tax rate from 11.5% to 3.2% on qualifying income.
Who Qualifies?
To be eligible for the Ontario SBD, a corporation must:
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Be a Canadian-controlled private corporation (CCPC) throughout the tax year.
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Earn active business income in Canada.
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Have taxable capital employed in Canada of less than $50 million in the previous tax year.
Notably, unlike the federal SBD, Ontario’s SBD is not reduced based on the amount of passive investment income earned.
Limitations and Phase-Out
While the full $500,000 business limit applies to many, it begins to phase out when a CCPC’s taxable capital employed in Canada exceeds $10 million, and is completely eliminated at $50 million.
Ineligible Businesses
The Ontario SBD does not apply to:
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Public corporations.
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Corporations controlled by non-residents.
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Corporations earning income from specified investment businesses or personal services businesses.
Claiming the Deduction
To claim the Ontario SBD:
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Complete Part 2 of Schedule 500, Ontario Corporation Tax Calculation.
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Enter the deduction amount on line 402 of Schedule 5, Tax Calculation Supplementary – Corporations.
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File these schedules with your T2 Corporation Income Tax Return.
Does the Ontario Small Business Deduction Expire?
The Ontario SBD is a permanent feature of the provincial tax system and does not have an expiration date. However, eligibility must be assessed annually, as changes in corporate structure or income levels can affect qualification.
By leveraging the Ontario Small Business Deduction, eligible corporations can significantly reduce their tax burden, freeing up resources to invest back into their businesses. Consult with Compass CPA to ensure your corporation meets all criteria and to maximize your tax benefits.
