Small business deduction 2026: 9% federal rate on the first $500,000

The 2026 small business rate in every province and territory

The federal rate for a CCPC claiming the small business deduction is 9%, against 15% on income that doesn't qualify canada.ca. Add the provincial or territorial lower rate and you have the combined rate on income inside both limits.

Don't trust the CRA rates table alone for 2026. It was last updated in May 2025 and still shows Ontario at 3.2% and Newfoundland and Labrador at 2.5%. The CRA's corporate what's new page carries both 2026 cuts: Ontario drops to 2.2% from July 1, 2026, and Newfoundland and Labrador drops to 2%, retroactive to January 1, 2026, then to 1.5% in 2027 and 1% in 2028 canada.ca. Newfoundland and Labrador's own Budget 2026 page gives the same schedule gov.nl.ca.

Alberta and Quebec collect their own corporate tax, so their figures come from them. Alberta's small business rate is 2% on a $500,000 limit alberta.ca. Quebec raised its deduction from 8.3% to 9.3% of its 11.5% general rate, so the lower rate falls from 3.2% to 2.2% revenuquebec.ca.

Watch the three provinces with a limit above $500,000. In Saskatchewan, Nova Scotia and Prince Edward Island, income between $500,000 and the provincial limit gets the provincial lower rate but the federal 15%, so the combined column only holds for the first $500,000.

How the 9% and the $500,000 work

Only a corporation that was a CCPC for the whole tax year can claim. The deduction is 19% of the least of four amounts on the T2: active business income carried on in Canada (line 400), taxable income as adjusted (line 405), the business limit (line 410), and the reduced business limit after any assignment (line 428) canada.ca.

You can't stack the two reductions. Section 123.4 sets the general reduction at 13% but takes income eligible for the small business deduction out of "full rate taxable income" first laws-lois.justice.gc.ca. So the real saving over the general rate is 6 points, worth $30,000 of federal tax on a full $500,000.

The $500,000 comes from subsection 125(2). Associated corporations share one limit and file an agreement assigning each member a percentage that totals no more than 100%. If the group doesn't file within 30 days of a written request from the Minister, the CRA makes the allocation under subsection 125(4) laws-lois.justice.gc.ca. The association tests themselves are on our page on associated corporations.

A CCPC can also assign some or all of its limit under subsection 125(3.2) to another corporation it earns specified corporate income from. The assignor reports the amount and the recipient's business number on page 4 of its T2 canada.ca.

The two grinds, and why they never add up

Subsection 125(5.1) reduces the business limit by the greater of a taxable capital reduction and a passive income reduction, not the sum of them laws-lois.justice.gc.ca.

The capital formula is A × B ÷ $90,000, where A is the limit before the grind and B is 0.225% × (taxable capital employed in Canada minus $10 million). At $50 million, B reaches $90,000 and the limit is gone. For tax years that started before April 7, 2022, the range was $10 million to $15 million canada.ca.

The passive formula is A ÷ $500,000 × 5 × (adjusted aggregate investment income minus $50,000). It's covered in full, with the AAII adjustments, on our passive income grind page.

Both grinds start from A, the limit this corporation would otherwise have. A member allocated 60% of the group limit starts from $300,000, and its grind shrinks in proportion.

Worked example: the taxable capital grind

Opco and Holdco are associated, and their Schedule 23 gives Opco 100% of the limit. The group's taxable capital employed in Canada for their last tax years ending in 2025 totals $22 million. Holdco earned $70,000 of adjusted aggregate investment income in its tax year ending in 2025. Opco's 2026 active business income and taxable income are both $600,000.

Without the grind, Opco would pay $45,000 on its first $500,000 and $15,000 on the last $100,000, for $60,000. The capital grind costs $9,000 of federal tax, which is the $150,000 it removed times the 6 point gap. The passive grind costs nothing extra here, because the capital grind is larger.

If Opco had only 60% of the limit, A would be $300,000, the capital grind would be $90,000, and its reduced limit would be $210,000.

Short years and rates that change partway through the year

For a tax year shorter than 51 weeks, subsection 125(5) prorates the limit by the days in the year over 365 laws-lois.justice.gc.ca. A new corporation with a 200 day first year gets $500,000 × 200 ÷ 365, or $273,973.

Ontario's lower rate drops from 3.2% to 2.2% effective July 1, 2026 ontario.ca. When a provincial rate changes during the tax year, the CRA has you weight each rate by the days it was in effect canada.ca. For a calendar 2026 year in Ontario, that's 3.2% for 181 days and 2.2% for 184 days, which works out to about 2.70%, or a combined 11.70%. Only a year that starts on or after July 1, 2026 gets 2.2% throughout. The full Ontario picture is on our Ontario corporate tax rate page.

Quebec doesn't prorate. Its 2.2% rate applies to taxation years beginning after April 29, 2026, so a calendar 2026 year stays at 3.2% and the first full year at the new rate is calendar 2027. Quebec's other conditions are unchanged, including the reduction tied to remunerated hours and primary and manufacturing activity, and its grind runs on paid up capital between $10 million and $50 million revenuquebec.ca.

Ontario and New Brunswick ignore the federal passive income grind. A CCPC that lost its whole federal limit to passive income still gets the Ontario lower rate ontario.ca or the New Brunswick lower rate canada.ca on up to $500,000. Both do follow the taxable capital grind.