Canada Small Business Deduction Calculator (Income Tax Act s. 125)

The famous 9% federal small business rate does not appear anywhere in the Income Tax Act. It is the result of three separate provisions stacking, and understanding the stack is what makes the grinds comprehensible.

Section 123(1) imposes a basic Part I tax of 38% on a corporation's taxable income. Section 124(1) then allows a deduction of 10% of taxable income earned in a province, leaving 28%. From there the Act branches. Income eligible for the small business deduction gets a further 19% off under s. 125(1.1), landing at 9%. Income above the limit gets the s. 123.4 general rate reduction of 13% instead, landing at 15%. This calculator derives both figures from the statutory components rather than asserting them, which is why the output shows every step.

The business limit itself is C$500,000 under s. 125(2), and it is one of the few Canadian tax figures that is genuinely fixed rather than indexed. What is not fixed is how much of it you keep. Section 125(5.1) grinds the limit two different ways: once for large taxable capital, and once for passive investment income earned inside the corporation. The Act applies the GREATER of the two reductions, not the sum, which is a detail people get wrong surprisingly often.

The passive income grind is the aggressive one. Every dollar of adjusted aggregate investment income above C$50,000 removes five dollars of business limit, so C$150,000 of passive income wipes out a full C$500,000 limit entirely. For a mature corporation with a large investment portfolio, that provision is often worth more attention than anything on the operating side.

Step 1: basic Part I tax under s. 123(1).

Step 2: the s. 124(1) abatement for income earned in a province.

Step 3: grind the business limit under s. 125(5.1), taking the greater of the two reductions.

Step 4: split the income at the reduced limit.

Step 5: the s. 125(1) deduction and the s. 123.4 reduction.

Step 6: federal tax, then provincial tax at the two rates you supply.

Using the page defaults: C$450,000 of active business income, no associated corporations, no passive income, no significant taxable capital, and provincial rates of 3.2% and 11.5%.

Step 1: basic Part I tax under s. 123(1). C$450,000 at 38%. C$171,000

Step 2: the s. 124(1) provincial abatement. C$450,000 at 10%. C$45,000

Step 3: check the business limit. No taxable capital grind and no passive income grind apply, so the full s. 125(2) limit survives. C$500,000

Step 4: split the income. All C$450,000 fits under the limit, so nothing reaches the general rate. C$450,000 at the small business rate

Step 5: the s. 125(1) small business deduction. C$450,000 at 19%. C$85,500

Step 6: federal tax. C$171,000 less C$45,000 less C$85,500. C$40,500

That is exactly 9% of C$450,000, and it was derived rather than assumed: 38 less 10 less 19.

Step 7: provincial tax. C$450,000 at the 3.2% provincial small business rate. C$14,400

Step 8: total corporate tax. C$40,500 plus C$14,400. C$54,900.00

Step 9: after-tax income retained in the corporation. C$450,000 less C$54,900. C$395,100.00

Step 10: what the same income would cost at the general rate. The combined general rate is 15% federal plus 11.5% provincial, so C$450,000 at 26.5% is C$119,250, and the deduction is worth C$119,250 less C$54,900. C$64,350.00

• Provincial corporate rates have no national value and were not verified. Every province legislates its own small business and general rates, and several set a provincial business limit that differs from the federal C$500,000. The defaults here are placeholders.
• Only active business income is modelled. Investment income inside a corporation is taxed under a different regime entirely, with refundable tax and the capital dividend account, none of which appears here. Personal services business income and specified investment business income are also excluded from the deduction and are not modelled.
• The s. 125(3) allocation among associated corporations is entered, not derived. Associated corporations share a single business limit and must file an agreement allocating it. This page lets you enter your share; it cannot work out the association rules for you.
• Taxable capital is entered as a single figure. The real s. 181.2 computation of taxable capital employed in Canada is involved, and the grind is measured on the ASSOCIATED GROUP's total, not just this corporation's.
• No integration with personal tax. Getting money out of the corporation as salary or dividends triggers a second layer of tax, and the whole point of the small business rate is that it is a deferral rather than an absolute saving. Use the dividend tax credit calculator on this site for that side.
• No refundable dividend tax on hand, no general rate income pool, no capital dividend account, and no eligible versus non-eligible dividend designation consequences.
• No provincial equivalents of the grinds. Some provinces parallel the federal passive income grind and some do not.

• Adding the two s. 125(5.1) grinds together. The Act applies the GREATER of the taxable capital reduction and the passive income reduction, not their sum. At the defaults with C$30 million of capital and C$60,000 of passive income, the reduction is C$250,000, not C$300,000.
• Underestimating the passive income grind. Five dollars of limit per dollar of investment income above C$50,000 is steep. A corporation with C$150,000 of passive income has no business limit left at all, and every dollar of active income jumps from 9% to 15% federally.
• Forgetting that associated corporations share one limit. Two corporations under common control do not get C$500,000 each. They get C$500,000 between them, and CRA's association rules are broader than most owners expect.
• Treating the small business rate as a permanent saving. It is mostly a deferral. The lower corporate rate buys you more capital to reinvest, but the money is taxed again when it leaves the corporation.
• Assuming the C$500,000 limit is indexed. It is not. Section 125(2) states it as a fixed amount, and it has stayed there while everything indexed around it has risen.

• Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s. 123(1), the 38% basic Part I rate. Justice Laws Website, read 2026-08-31; Act current to 2026-06-21, last amended 2026-06-18. laws-lois.justice.gc.ca/eng/acts/I-3.3/section-123.html
• Income Tax Act, s. 124(1), the 10% abatement for taxable income earned in a province. Justice Laws Website, read 2026-08-31. laws-lois.justice.gc.ca/eng/acts/I-3.3/section-124.html
• Income Tax Act, s. 125: s. 125(1.1) for the 19% small business deduction rate for years after 2018, s. 125(2) for the C$500,000 business limit, s. 125(3) for the allocation among associated corporations, and s. 125(5.1) for the taxable capital and passive investment income reductions. Justice Laws Website, read 2026-08-31. laws-lois.justice.gc.ca/eng/acts/I-3.3/section-125.html
• Income Tax Act, s. 123.4, the 13% general rate reduction and the definition of full rate taxable income that excludes income eligible for the small business deduction. Justice Laws Website, read 2026-08-31. laws-lois.justice.gc.ca/eng/acts/I-3.3/section-123.4.html

Also consulted: Provincial corporate tax rates are set in each province's own legislation and have no national value, so they are user inputs.