Quebec Small Business Deduction (SBD) – 2025 Guide

The Quebec Small Business Deduction (SBD) is a cornerstone incentive that allows eligible Canadian-Controlled Private Corporations (CCPCs) carrying on business in Quebec to benefit from a reduced provincial corporate tax rate on their first $500,000 of active business income. Originally introduced to help small and medium-sized Quebec companies compete, the SBD has evolved over the years to include sector-based and employee-hours rules, making it both powerful and complex. Since its inception, the Quebec SBD has delivered hundreds of millions in annual tax relief to Quebec businesses and remains in addition to the federal SBD.

Current SBD Rate: 3.2% (provincial corporate tax rate on eligible income, 2025)
Limit: First $500,000 of active business income
Phased-Out: For CCPCs with taxable capital between $10M and $15M

Quebec business team meeting in a modern Montreal office

Eligibility Criteria & Flowchart

Corporation Type: Your business must be a Canadian-Controlled Private Corporation (CCPC) carrying on business in Quebec.
Active Business Income: Only active business income qualifies (investment income is excluded).
Employee Hours or Primary Activities: To access the full SBD rate, your corporation must generally meet at least one of:
- Have at least 5,500 employee hours paid in Quebec in the tax year, OR
- Be in a qualifying sector (e.g. manufacturing, primary sector, certain tech/innovative businesses; see official list)
Phased-Out for Large CCPCs: The $500,000 SBD limit is reduced for businesses with taxable capital between $10 million and $15 million (across any associated companies).
Professional Corporations: Certain professional corporations (e.g. law, accounting, medicine) may be excluded from the SBD.

Eligibility Checklist Flowchart:

Is your company a CCPC with a permanent establishment in Quebec?
Is your business income active (not investment)?
Did you pay at least 5,500 employee hours in Quebec OR operate primarily in a qualifying sector?
Is your taxable capital (including associated companies) under $15M? SBD phases out from $10M–$15M.
Are you a professional corporation not excluded by the SBD rules?

If you answered YES to all, you likely qualify. If unsure, consult a Quebec tax advisor or official Revenu Québec resources.

Step-by-Step SBD Calculation Examples

Example 1: Service Corporation Meeting Employee Hours

Quebec CCPC, $350,000 active business income, 6,000 employee hours paid in Quebec
Taxable capital: $5M
Eligible for full SBD: $350,000 x 3.2% = $11,200 Quebec SBD tax (far less than general rate)

Example 2: Manufacturing Corporation, Low Employee Hours

Quebec CCPC, $500,000 active income, only 2,000 employee hours
Operates in a qualifying manufacturing sector
Eligible for full SBD due to sector rule: $500,000 x 3.2% = $16,000 SBD tax

Example 3: Corporation Above Phase-Out Threshold

Taxable capital: $13M (within $10M–$15M phase-out range)
Calculated SBD limit is reduced proportionally (e.g., to $250,000 of active income)
Claim SBD on first $250,000, general rate on remainder

Example 4: Professional Corporation Exclusion

Law firm incorporated as a CCPC, $400,000 active income
Does NOT qualify for SBD due to professional corporation exclusion

How to Claim the Quebec SBD (Step-by-Step)

Calculate your active business income earned in Quebec for the tax year.
Confirm your company meets the employee hours (5,500+) or sector activity rule for the year.
Complete Schedule 34 of the Quebec corporate tax return (CO-17).
Apply the SBD rate (3.2%) to the first $500,000 of qualifying income (or prorated limit if in phase-out range). Any excess income is taxed at the general Quebec corporate tax rate.
For associated corporations, allocate the SBD limit among all related companies.
File all required supporting schedules and maintain records of payroll, employee hours, and business activities for audit purposes.

Tip: Maintain detailed payroll logs and employee hour records. If you do not meet the hours threshold, check if your business qualifies for the manufacturing/primary sector exception. If uncertain, consult a Quebec tax professional.

Claim Documentation & Common Errors

Keep all payroll records, T4s, RL-1s, and detailed logs of employee hours worked in Quebec.
If claiming sector-based eligibility, retain NAICS industry codes and proof of qualifying business activities.
Maintain documentation showing your taxable capital calculation and allocations among associated companies.
Common errors include: under-reporting hours, failing to allocate SBD among associated corporations, claiming SBD for excluded professional corporations, or incomplete supporting schedules.

Frequently Asked Questions

Can the Quebec SBD be claimed along with the federal small business deduction?

Yes. The Quebec SBD and federal SBD are separate programs and can be stacked, providing significant combined tax savings for eligible businesses.

What if I do not meet the 5,500 hours rule?

If your business is in a qualifying sector (such as manufacturing or primary sector), you may still be eligible for the full SBD even if you do not meet the hours test. Review current Revenu Québec guidance or consult a tax professional.

What documentation is required?

Keep detailed payroll records (T4s, RL-1s), employee hour logs, and documentation proving your primary business sector and activities.

What if I have associated corporations both in and out of Quebec?

The $500,000 SBD limit is shared Canada-wide among all associated CCPCs. You must allocate the limit and file proper agreements for both federal and Quebec returns. Allocation errors are a common audit trigger.

What are common audit triggers for the SBD?

Underreported employee hours, lack of documentation, incorrect sector classification, or inconsistent allocation with federal SBD often lead to audit. Ensure all calculations and support are airtight.

Can SBD eligibility change during the year?

Yes. If employee hours or primary activities change, you may be only partially eligible. Track carefully and consult a professional if your business is in transition.

Are there other Quebec business credits that can be claimed together with SBD?

Yes. Many Quebec business credits (R&D, multimedia, regional investment, hiring credits) can be combined with the SBD, subject to program rules and expenditure overlap. See links below for details.

Related Quebec Business Credit Pages & Further Resources

Quebec Business Tax Credits Directory
Quebec R&D/Innovation Credits
Quebec Multimedia, Game & Film Credits
Quebec Green & Clean Tech Credits
Quebec Hiring & Training Incentives
Canada-Wide Business Tax Credits
Quebec Individual Tax Breaks (see for owner-managers & personal SBD impacts)