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 (SBD) rate (8%) for the year, resulting in a lower tax rate of 3.5%. Before January 1, 2018, the SBD rate was 7% and the lower tax rate was 4.5%.
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.
Calculate a corporation's Ontario small business income for the tax year by multiplying its Ontario domestic factor by the least of the following amounts:
- the income from an active business carried on in Canada (amount on line 400 of the T2 return)
- the federal taxable income, less adjustment for foreign tax credit (amount on line 405 of the T2 return)
- the reduced federal business limit on line 425, less the amount of the business limit you assigned under subsection 125(3.2) (amount on line 427 of the T2 return)
Ontario small business income cannot exceed Ontario taxable 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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