Ontario Small Business Deduction (SBD) Guide 2025
The Ontario Small Business Deduction (SBD) is a cornerstone of Ontario's business tax system, providing incorporated small businesses—specifically Canadian-Controlled Private Corporations (CCPCs)—with a significantly reduced provincial corporate income tax rate on their first $500,000 of active business income. By combining the Ontario SBD with the federal SBD, eligible Ontario small businesses can achieve one of the lowest combined corporate tax rates in Canada. This guide explains eligibility, rates, phased-out thresholds, claim steps, association rules, and advanced strategies for maximizing your Ontario SBD savings.
What is the Ontario Small Business Deduction?
The Ontario SBD is a provincial corporate tax rate reduction for eligible CCPCs on the first $500,000 of active business income earned in Ontario each year. For 2025, the Ontario small business corporate income tax rate is 3.2% (subject to change in future provincial budgets), compared to the general corporate tax rate of 11.5%. When combined with the federal SBD (9% rate), a qualifying Ontario small business pays a much lower tax rate on its first $500,000 of active business profits. This is a major advantage for Ontario-based startups and SMEs, supporting job creation and economic growth across the province.
- Key Benefit: Reduces Ontario tax from 11.5% to 3.2% on the first $500,000 of active business income.
- Automatic if eligible: Most certified tax software applies the SBD if all required schedules are filed correctly.
- Stackable with federal SBD: Small businesses can access both federal and Ontario SBD, lowering the overall effective tax rate.
Ontario SBD Eligibility Criteria: Who Qualifies?
- Canadian-Controlled Private Corporation (CCPC) throughout the tax year, as defined by the Income Tax Act.
- Carry on active business income in Ontario (not investment income, specified investment businesses, or personal services businesses).
- Taxable capital employed in Canada (including all associated corporations) must be under $15 million; the SBD is phased out between $10M–$15M.
- The $500,000 SBD limit is shared among all associated corporations (Canada-wide), regardless of province.
- Must have a permanent establishment in Ontario during the tax year.
- Professional corporations, investment holding companies, and some personal service businesses may not qualify. Always confirm your corporate status with your accountant if your situation is complex.
If you are part of a corporate group (associated companies), you must allocate the $500,000 SBD limit among the group and file Schedule 23 (Association) with your return. Failure to do so can lead to denied claims and CRA penalties.
Ontario Small Business Tax Rate (2025): SBD vs. General Corporate Rate
| Income Bracket | Ontario Tax Rate | Federal Tax Rate | Combined Rate |
|---|---|---|---|
| First $500,000 active business income (CCPC, SBD eligible) | 3.2% | 9% | 12.2% |
| Income above $500,000 | 11.5% | 15% | 26.5% |
Tip: Claiming the Ontario SBD is automatic if you file all schedules correctly. If you have associated companies, ensure the $500,000 limit is allocated among them and reported on your return.
How to Claim the Ontario SBD: Step-by-Step
- Prepare your T2 Corporation Income Tax Return and all necessary Ontario schedules (especially Schedule 500 for Ontario corporate tax calculation).
- Report your active business income and allocate the SBD limit if you have associated corporations (use Schedule 23 if applicable).
- Ensure your tax software or preparer correctly calculates the SBD and applies the 3.2% rate to the eligible income.
- Keep supporting records: incorporation documents, income breakdowns, and association schedules.
- If you have SBD phased-out due to taxable capital, complete the phase-out calculation on the relevant schedule.
- File ON479 for any additional Ontario credits claimed in the same tax year.
- Common Supporting Schedules: Schedule 500 (Ontario tax), Schedule 23 (Association of Corporations), Schedule 4 (Active Business Income), ON479 (Ontario Credits). Attach to your T2 filing.
- Phased-out SBD: If your taxable capital is between $10M–$15M, the SBD is reduced on a straight-line basis—ensure the phase-out is calculated and reported.
If you operate in multiple provinces, you must apportion your taxable income and allocate the SBD accordingly. See example below.
SBD Calculation Examples & Scenarios
Single Ontario Corporation Example
Scenario 1: Ontario CCPC with $400,000 active business income, $2M taxable capital, no associated companies.
- Ontario SBD applies on full $400,000.
- Ontario tax: $400,000 x 3.2% = $12,800
- Federal tax (SBD): $400,000 x 9% = $36,000
- Total tax on $400,000: $48,800 (12.2% combined rate)
Associated Corporation & SBD Allocation Example
Scenario 2: Two associated Ontario CCPCs, each earning $350,000 active business income.
- The $500,000 SBD limit must be allocated—e.g., $250,000 to Corp A, $250,000 to Corp B.
- Corp A: $250,000 at 3.2% (SBD) + $100,000 at 11.5% (general rate)
- Corp B: $250,000 at 3.2% (SBD) + $100,000 at 11.5% (general rate)
- Federal SBD must also be allocated and reported on Schedule 23 and 4.
Phase-Out Example (Taxable Capital Exceeds $10M)
Scenario 3: Ontario CCPC, $500,000 active business income, $12M taxable capital.
- SBD is phased out between $10M–$15M taxable capital. For $12M, only 60% of SBD limit applies:
($15M - $12M) / $5M = 60% - Eligible SBD = $500,000 x 60% = $300,000
- Ontario tax: $300,000 x 3.2% + $200,000 x 11.5%
Multi-Province Example
Scenario 4: Ontario CCPC with permanent establishments in Ontario and Alberta. $600,000 total active business income: $400,000 earned in Ontario, $200,000 in Alberta.
- SBD must be prorated by province. Allocate the $500,000 SBD limit based on provincial income split.
- Ontario: $400,000 SBD-eligible; Alberta: $100,000 SBD-eligible (since $500,000 - $400,000 = $100,000 remains for Alberta).
- Each province’s schedule must be completed. The SBD rate and phase-out thresholds may differ by province.
Audit Risks, Common Errors & Best Practices for SBD Claims
- Not allocating the SBD limit among associated corporations—may result in denied claims and penalties. Always file Schedule 23 if you are part of a group.
- Including ineligible income (investment, specified corporate, or personal services business income). Only active business income qualifies.
- Missing required Ontario schedules or not calculating the phased-out deduction when taxable capital exceeds $10M.
- Omitting supporting documentation—such as association agreements, business activity breakdowns, or capital calculations. CRA may request these on audit.
- Incorrectly claiming SBD for professional corporations that do not qualify (e.g., those deemed personal service businesses).
- Multi-province error: Failing to apportion SBD and income by province, or using the full $500,000 limit in more than one province.
Best practices: Keep a dedicated SBD file each year with all association schedules, capital calculations, supporting documents, and correspondence with your accountant. Consult a tax professional if you have any doubt about eligibility or allocation.
Ontario SBD Compared to Other Provinces
| Province | SBD Rate | SBD Limit | Phased Out |
|---|---|---|---|
| Ontario | 3.2% | $500,000 | $10M–$15M taxable capital |
| Alberta | 2% | $500,000 | $10M–$15M |
| BC | 2% | $500,000 | $10M–$15M |
| Saskatchewan | 0% | $600,000 | $10M–$15M |
| Manitoba | 0% | $500,000 | $10M–$15M |
| Quebec | 3.2% | $500,000 | $10M–$15M |
| Nova Scotia | 2.5% | $500,000 | $10M–$15M |
| New Brunswick | 2.5% | $500,000 | $10M–$15M |
Observation: Ontario’s SBD is highly competitive, but some provinces (Saskatchewan, Manitoba) have a 0% SBD rate up to their threshold. Each province's rules regarding SBD rate, threshold, and phase-out are slightly different—always check current rates if you operate in more than one jurisdiction.
For Canada-wide SBD guidance, see our Canada-Wide Small Business Deduction Guide.
Frequently Asked Questions: Ontario SBD
Can I claim both the Ontario and the federal SBD?
Yes! Most Ontario CCPCs can claim both provincial and federal SBD, subject to eligibility and the $500,000 limit (shared among associated companies). This offers a major tax advantage for small businesses.
How does SBD allocation work for companies with fiscal year-ends?
If your fiscal year straddles two calendar years, prorate the SBD limit and rates based on days in each year. SBD allocation among associated corporations must also be prorated accordingly.
How do I claim SBD if my company operates in multiple provinces?
Allocate your income and SBD claim based on the proportion of taxable income earned in each province. File the relevant provincial schedules (e.g., ON500 for Ontario, BC428 for BC) and apportion the $500,000 limit among all associated companies, regardless of province.
Can new startups claim the Ontario SBD?
Yes. As soon as your corporation qualifies as a CCPC with active business income in Ontario, you are eligible for the SBD up to the $500,000 limit (prorated for short tax years).
What if I missed claiming the Ontario SBD in a prior year?
You can request a T2 adjustment (T2-ADJ) for up to 3 prior tax years. Gather all supporting documentation before submitting your amended return.
Do professional corporations qualify?
Some professional corporations (e.g., doctors, lawyers) may be ineligible if CRA deems them personal service businesses. Always confirm your corporation’s status before claiming.
Can I stack the SBD with other Ontario or federal credits?
Yes, you can claim the SBD alongside other credits such as R&D/innovation, hiring, and digital media credits, provided you meet eligibility for each and do not double-claim the same income for multiple deductions.
What documentation is required if audited?
CRA may request association agreements, taxable capital calculations, active business income breakdowns, and detailed supporting schedules. Keep all records for at least 6 years after filing.