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. However, the Ontario surtax re Ontario small business deduction claws back the small business deduction from more profitable CCPCs.

Before 2009 this deduction was known as the incentive deduction for small business corporations.

The deduction is calculated by multiplying the corporation's Ontario small business income for the tax year by the small business deduction rate (8.5%) for the year, resulting in a lower tax rate of 5.5%.

Effective July 1, 2010, the small business deduction rate is 7.5%, resulting in a lower tax rate of 4.5%.

The tax is prorated based on the number of days in the year when the tax year straddles July 1, 2010.

A corporation's Ontario small business income for the tax year is its Ontario domestic factor multiplied 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); or
• the unreduced federal business limit adjusted for Ontario's higher business limit of $500,000 for days in the tax year that are in 2008 (line 3 on page 1 of Schedule 500).

A 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 does not have to be filed with your return.

On line 402 of Schedule 5, Tax Calculation Supplementary - Corporations, enter the Ontario small business deduction amount.

Forms and publications

• Schedule 5, Tax Calculation Supplementary - Corporations
• Schedule 500, Ontario Corporation Tax Calculation

Government partners

• Ontario (Ministry of Revenue)