Small business deduction (SBD)

The small business deduction (SBD) is a tax break: it reduces the federal tax rate to 9% on the first $500,000 of profits for a Canadian-controlled private small corporation (CCPC) that operates a business. In Quebec, a similar provincial tax rebate applies if the corporation qualifies.

At a glance

Reduced federal tax rate of 9% (instead of 15%) on the first $500,000 of operating profits
Reserved for CCPCs: Canadian-controlled private corporations (owned by Canadians, not publicly traded)
In Quebec, eligibility for the reduced rate requires, among other things, 5,500 hours of paid work during the year
The $500,000 cap is shared among “affiliated” companies (those belonging to the same group)
The combined federal and Quebec tax rate drops from about 26.5% to about 11.2% on eligible profits

Why it matters

If you’re incorporated in Quebec, the SBD is often your biggest tax benefit. Example: On $100,000 in eligible profit, the combined federal and provincial tax rate drops from about 26.5% to about 11.2%, a savings of nearly $15,000 in taxes, money you can keep to reinvest. But we regularly see Quebec SMEs (small and medium-sized businesses) lose the reduced provincial tax rate because they fail to reach the 5,500 paid-hour threshold, or see it diminish due to tax sharing among related companies. An accountant who plans your compensation and structure around the SBD can save you thousands of dollars each year. Bankeo connects you, for free, with a verified accountant/CPA who understands the realities of incorporated SMEs, and we’re here to support you every step of the way.

The SBD is tied to how you pay yourself: the profits that qualify for this deduction, which are taxed at a reduced rate, help fund Undetermined dividends, factors to consider when making a choice Salary or Dividend. It applies only if you are a CCPC (Canadian-controlled private corporation), so after a incorporation. The $500,000 cap and the 9% federal rate are detailed by the Canada Revenue Agency (source). To make sure every dollar goes where it should, Bankeo connects you, at no cost, with a vetted accountant who specializes in incorporated SMEs, and we’re here to support you every step of the way.

Frequently asked questions

What exactly is the SBD, in simple terms?

It’s a tax break reserved for small Canadian private corporations. On the first portion of profits (up to $500,000 per year), the government charges a much lower tax rate than usual. As a result, the company keeps more money, which it can reinvest or distribute.

What is the tax rate with the SBD in Quebec?

At the federal level, eligible profits are taxed at 9% instead of the standard rate of 15%. In Quebec, the rate drops to 2.2% if the company qualifies (specifically, with 5,500 paid hours); otherwise, it is 11.5%. Combining the two, the tax rate drops from about 26.5% to about 11.2%.

Who is eligible, and how can you make the most of it?

You must be a CCPC (Canadian-Controlled Private Corporation) that operates a genuine business in Canada. The $500,000 limit decreases if the group has more than $10 million in “capital” (the total of its owner-funded assets and debt), and it is shared among related companies; investment income, however, does not qualify for this deduction. To help you optimize your situation, Bankeo connects you, for free, with a vetted accountant or CPA who understands the realities of incorporated small and medium-sized businesses, and we’re here to support you every step of the way.