Canada Small Business Tax Deductions: Qualifications and Requirements

Canada Small Business Tax Deductions: Qualifications and Requirements

Small business owners are always looking to save money, including with taxes. The government wants to stimulate business activity, so they allow Canadian businesses to deduct certain expenses from their tax returns. 

Many business owners know about simple deductions like office supplies, but there are several more to consider. Today, the team at Group Enroll is here to explain Canada small business tax deductions and how they can help your business.

Table of Contents

How Do Tax Deductions for Businesses Work?

Tax deductions for businesses work the same way as they do for individuals. The Canada Revenue Agency (CRA) allows companies to subtract expenses from their taxable income, lowering the total amount of taxes they must pay. Many businesses take advantage of deductions to drop income brackets, further reducing the amount of tax they have to pay. 

Tax deductions are different from tax credits. Tax credits directly lower the amount of owed taxes, while deductions reduce the income you pay taxes on. Tax deductions can potentially save thousands on taxes for businesses, so it’s important to take full advantage of as many as possible.

Small Business Deduction

The small business deduction (SBD) is a tax deduction specifically for Canadian-controlled private corporations. The SBD provides Canadian-owned small businesses with a tax reduction on qualifying profits. 

The SBD taxes small business profits at an effective rate of 9% rather than the typical corporate rate of 15%. Individual provinces may also have further small business tax deductions. To qualify for the deduction, a small business must:

  • Be a privately owned corporation that does not sell shares on the stock market
  • Be a Canadian corporation or reside in Canada
  • Not be controlled by non-residents or publicly owned corporations

Businesses that hold up to $10 million in taxable capital can get a reduced tax rate on the first $500,000 of business income. Businesses with more than $10 million in taxable capital have reduced limits as follows:

Total Taxable CapitalDeduction Limit
$10 million$500,000
$11 million$400,000
$12 million$300,000
$13 million$200,000
$14 million$100,000
$15 millionN/A

Businesses with more than $15 million in taxable capital are not eligible for the SBD. Canadian law defines business income relatively loosely as any of the following:

  • Income from business activity
  • Income that is incidental from business activity
  • Income from concern in a trad

In other words, as long as the income is from business activity and not investments or personal service, you can claim it as business income.

Other Tax Deductions for Canadian Businesses

Generally speaking, businesses can deduct certain types of business and operating expenses. It is crucially important that businesses keep thorough records of all expenses so they can provide proof if the CRA requests additional information. Below are some of the most common Canada small business tax deductions.

Accounting and Legal Deductions

Advertising Deductions

Depreciation Deductions

Charitable Donation Deductions

Office Expenses Deductions

Insurance Deductions

Bank Charges and Interest Deductions

Rent Deductions

Food and Entertainment Deductions

Maintenance and Repair Deductions

Vehicle and Travel Deductions

Wage Deductions

How Do I Claim Small Business Tax Deductions?

Canadian corporations fill out CRA form T2125 to claim deductions on taxable income. Part 4 of the document has lines where you can report the total business expenses you wish to deduct from your taxable income. For example, line 9060 is for reporting deducted salaries, wages, and benefits. Line 9200 is for deducting qualifying travel expenses. 

Parts A through F on the form are for deducting capital property and assets, while part 7 is for self-employed people to deduct home office expenses. When filling out the returns, make sure that you list deductible amounts under the correct section. Depending on what you claim, the CRA may contact you for more information about business expenses. 

The CRA takes tax fraud seriously, and falsely reporting illegitimate Canada small business tax deductions can incur a financial penalty equal to 50% of the overstated deduction or $100, whichever is larger.


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