Nova Scotia Small Business Deduction (SBD) Guide for 2025
The Nova Scotia Small Business Deduction (SBD) is a foundational pillar in the province's business tax environment. By offering a significantly reduced provincial corporate income tax rate on the first $500,000 of active business income, it helps eligible Canadian-Controlled Private Corporations (CCPCs) in Nova Scotia retain more profit, reinvest in growth, and compete in the national marketplace. The SBD, when combined with the federal SBD, delivers some of the most effective tax relief for small and medium-sized enterprises (SMEs) in Atlantic Canada.
Fast Fact: Nova Scotia's SBD is stackable with the federal SBD, allowing qualifying businesses to benefit from both rate reductions on the same active business income.
How the Nova Scotia SBD Works
- Reduced Tax Rate: For 2025, the Nova Scotia small business corporate income tax rate is 2.5% (compared to the general rate of 14%).
- Limit: Applies on the first $500,000 of active business income, shared among associated corporations.
- Eligibility: Only Canadian-Controlled Private Corporations (CCPCs) with permanent establishment in Nova Scotia can claim. Most professional corporations also qualify.
- Phasing Out: The SBD is phased out for CCPCs with taxable capital between $10M and $15M (federally-aligned).
- Stackable: The Nova Scotia SBD is stackable with the federal small business deduction—so you benefit from both rate reductions.
Scenario Example: A Nova Scotia CCPC earns $400,000 in active business income. With the SBD, it pays just 2.5% provincial tax on this amount ($10,000), instead of 14% ($56,000) — $46,000 in direct provincial tax savings. Add the federal SBD, and the total tax bill is even lower.
Eligibility Criteria
- Must be a CCPC throughout the tax year.
- Carrying on active business (not investment income) in Nova Scotia.
- Taxable capital employed in Canada less than $15 million (full SBD for less than $10M, phased out between $10M and $15M).
- Associated corporations must share the $500,000 limit (see below for calculation).
Associated Corporations Example: If two associated CCPCs (A and B) both operate in Nova Scotia, they must allocate the $500,000 SBD limit. If A claims $350,000, B can only claim $150,000. Allocation agreements must be filed with NS tax schedules.
Understanding the Phase-Out
If your group’s taxable capital employed in Canada is between $10 million and $15 million, the available SBD is gradually reduced to zero. For example, with $13M in taxable capital:
- Total SBD limit = $500,000 × (15,000,000 – 13,000,000) ÷ 5,000,000 = $200,000
- You can only apply the SBD rate to the first $200,000 of active business income.
Step-by-Step: How to Claim the Nova Scotia SBD
- Determine Active Business Income: Calculate your active business income (ABI) for the tax year, excluding investment, specified investment business, and personal services business income.
Tip: Retain working papers for ABI calculation for audit purposes. - Allocate SBD Limit if Associated: If you have associated corporations, allocate the $500,000 SBD limit among them. File an agreement with your return.
Example: 3 companies, $500,000 split as $250,000/$150,000/$100,000. - Complete Tax Schedules: On your T2 corporate return, complete Nova Scotia Schedules NS428 (tax calculation) and NS479 (tax credits). Indicate your SBD claim, taxable capital, and income allocation.
- Multi-Province Apportionment: If you operate in more than one province, apportion your business income and SBD limit based on revenue, payroll, or asset location as required by CRA/NS rules.
- Documentation: Maintain records for income, taxable capital, SBD allocation agreements, and business activity in Nova Scotia. CRA and NS auditors can request these up to 7 years after filing.
Official Forms: Download from Nova Scotia Finance: Corporate Income Tax.
Practical Scenarios & Calculation Tips
- Single NS CCPC earning $300,000 ABI: Pays 2.5% on all $300,000, saving over $34,500 compared to full rate. No allocation or phase-out needed.
- Associated NS CCPCs (A and B): A earns $400,000, B earns $250,000. They agree to allocate $300K to A, $200K to B. Income above limit is taxed at 14%. Must file allocation agreement and split on NS428.
- Multi-Province Business: A CCPC with $700,000 ABI, 60% in NS, 40% in NB. SBD limit in NS: $500,000 × 60% = $300,000. Balance of ABI in NS is taxed at the full provincial rate.
- Taxable Capital $12M: SBD limit = $500,000 × (15,000,000 – 12,000,000) ÷ 5,000,000 = $300,000. Only $300,000 eligible for SBD rate.
Note: Always check for annual changes to tax rates and SBD thresholds.
Frequently Asked Questions (FAQ)
Can I claim both the Nova Scotia and federal SBD?
Yes, eligible CCPCs claim both. You pay the combined reduced rate on the first $500,000 of active business income. The claim process is coordinated via federal and NS schedules.
What if my business is associated with others?
The $500,000 limit is shared among all associated corporations. File an allocation agreement and indicate the split on both NS and federal returns. Failure to do so can result in disallowed claims.
Does the SBD apply to investment income?
No. Only active business income is eligible. Investment, specified investment business income, and personal services business income are excluded.
Can professional corporations claim the SBD?
Yes. Most professional corporations (lawyers, doctors, dentists, etc.) qualify, unless specifically excluded by CRA or Nova Scotia rules.
What documentation should I keep?
Retain working papers for ABI, allocation agreements, taxable capital calculations, and any supporting schedules for at least 7 years.
What are common mistakes?
Not allocating the SBD limit among associated corporations; claiming SBD on ineligible investment income; failing to update for phased-out limits when taxable capital exceeds $10M; missing required schedules.