Ontario small business deduction
A corporation that was a Canadian-controlled private corporation (CCPC) throughout the tax year can reduce its Ontario basic income tax by claiming the Ontario small business deduction.
The deduction is calculated by multiplying the corporation's Ontario small business income for the tax year by the small business deduction rate (8.3%) for the year, resulting in a lower tax rate of 3.2%. Before January 1, 2020, the deduction rate was 8% and the lower tax rate was 3.5%.
If the rate changes during the tax year, you have to base your calculation on the number of days in the year that each rate is in effect.
The Ontario small business deduction is phased out for CCPCs (including associated corporations) with taxable capital employed in Canada of more than $10 million in the previous tax year. It is completely eliminated when the taxable capital is $15 million or more in the previous tax year. This is referred to as the taxable capital business limit reduction.
The Ontario small business limit is not subject to the federal passive income business limit reduction. (See the details about the reduced business limit.) As such, eligible Ontario small businesses can receive the Ontario small business deduction regardless of the amount of passive income they earned.
Ontario small business income cannot exceed Ontario taxable income.
When calculating the Ontario small business income, the corporation's Ontario domestic factor is the ratio of the corporation's Ontario taxable income to the corporation's taxable income earned in all provinces and territories.
Claiming the deduction
You can use Part 2 of Schedule 500, Ontario Corporation Tax Calculation, to calculate the deduction. Schedule 500 is a worksheet and you do not have to file it with your return.
On line 402 of Schedule 5, Tax Calculation Supplementary – Corporations, enter the Ontario small business deduction amount.
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