Business income tax in Canada depends first on how your business is set up. Sole proprietors and partners report business income on their personal return and pay tax at their individual marginal rates. Corporations are separate taxpayers: they file a T2 return and pay 15 percent federal tax on general active business income, or 9 percent on the first $500,000 for qualifying Canadian-controlled private corporations, with provincial or territorial tax added on top.
How Your Business Structure Changes the Tax
A sole proprietorship and its owner are the same legal person. Revenue from the business flows straight onto your personal tax return and is taxed at your marginal rate alongside any other income. There is no separate business-level tax.
Partnerships work the same way from a tax perspective. The partnership itself does not pay income tax or file an income tax return. Each partner reports their share of the partnership’s net income or loss on their own return, whether that share was paid out in cash or simply credited to a capital account.1Canada Revenue Agency. Reporting Partnership Income The allocation follows the partnership agreement, subject to limits in the Income Tax Act.
A corporation is different. It is a separate legal person that files its own return and pays its own tax on profits. When after-tax profits are paid to shareholders as dividends, shareholders report the dividends on their personal returns. Canada addresses this layering through a dividend gross-up and tax credit mechanism: you gross up the dividend to approximate the corporation’s pre-tax income, then claim a federal dividend tax credit for the portion already taxed at the corporate level. Corporate income paid out as dividends ends up taxed at roughly the same total rate as income earned directly by an individual, though the match is imperfect and varies by province.
Federal and Provincial Corporate Rates
The basic federal corporate tax rate is 38 percent of taxable income. The federal tax abatement, which accounts for provincial taxation, drops that to 28 percent, and the general tax reduction brings the net federal rate to 15 percent for most corporations.2Canada Revenue Agency. Corporation Tax Rates
Canadian-controlled private corporations that qualify for the small business deduction pay a net federal rate of 9 percent on the first $500,000 of active business income.2Canada Revenue Agency. Corporation Tax Rates Associated corporations share that $500,000 threshold, and it starts shrinking if the corporate group’s taxable capital employed in Canada exceeds $10 million or its adjusted aggregate investment income exceeds $50,000 in the preceding year. Income above the threshold is taxed at the general 15 percent federal rate.
Provincial and territorial corporate taxes are added on top. Small business rates run roughly 1 to 4 percent depending on the province, and general corporate rates run from about 8 to 16 percent. Combined federal-provincial rates for small business income typically land between 10 and 13 percent, and general corporate income faces combined rates of roughly 23 to 31 percent. These numbers shift frequently, so check your provincial finance ministry’s current schedule before relying on any specific figure.
Calculating Taxable Business Income
Taxable business income is gross revenue minus legitimate business expenses. The Income Tax Act sets the baseline rule: you can deduct an expense only if it was incurred for the purpose of earning income from the business.3Department of Justice Canada. Income Tax Act – Section 18 Personal living costs cannot be deducted against business revenue.
Common deductible expenses include rent, insurance, utilities, office supplies, advertising, and professional fees. These are deductible in the year they relate to. The Income Tax Act specifically blocks deductions for prepaid expenses covering periods after the end of your tax year, so you cannot accelerate rent or insurance into the current year to reduce this year’s taxable income.3Department of Justice Canada. Income Tax Act – Section 18 Expenses for long-lived assets like buildings, equipment, and vehicles are handled separately through the Capital Cost Allowance system.
Capital Cost Allowance
You cannot deduct the full cost of a major asset such as a truck, a computer system, or office furniture in the year you buy it. Instead, the CCA system spreads the deduction over several years at rates assigned to specific asset classes. Class 8 covers most furniture and general equipment at a 20 percent declining-balance rate. Class 10 covers motor vehicles at 30 percent. Buildings fall into Class 1 at 4 percent. Each year, you apply the class rate to the remaining undepreciated balance, so the deduction shrinks over time.4Canada Revenue Agency. Claiming Capital Cost Allowance (CCA)
The Accelerated Investment Incentive, introduced in late 2018, enhanced first-year CCA deductions for newly acquired property. For assets that become available for use during the 2024–2027 phase-out period, the incentive doubles the normal first-year deduction for property that would otherwise be subject to the half-year rule, and provides one-and-a-quarter times the normal deduction for property not subject to that rule.5Canada Revenue Agency. Accelerated Investment Incentive These enhanced rates phase out completely for property available for use after 2027.
Home Office Deduction
If you run your business from home, you can deduct a portion of your household costs, but only if your home workspace is your principal place of business, or you use a dedicated space regularly and exclusively for meeting clients or earning business income.6Canada Revenue Agency. Business-Use-of-Home Expenses Eligible costs include heating, electricity, home insurance, property taxes, mortgage interest, and rent if you are a renter.
The deduction is based on the proportion of your home used for business. The simplest method divides the area of your workspace by the total area of your home. If the space doubles as a living area, you further reduce the claim based on the hours per day you use it for business. One critical limit: home office expenses cannot create or increase a business loss. If your business income before these deductions is $2,000 and your home office expenses are $3,500, you can claim only $2,000. The unused $1,500 carries forward.6Canada Revenue Agency. Business-Use-of-Home Expenses
GST/HST Registration and Collection
Beyond income tax, most businesses that sell taxable goods or services must register for a GST/HST account and collect sales tax from customers. The exception is small suppliers. If your total worldwide taxable revenue is $30,000 or less in a single calendar quarter and over the last four consecutive calendar quarters, registration is optional.7Canada Revenue Agency. When to Register for and Start Charging the GST/HST Once you cross that $30,000 threshold, registration becomes mandatory. Taxi and commercial ride-sharing drivers must register regardless of revenue.
Once registered, the CRA assigns your filing frequency based on your annual taxable supplies. Businesses with $1.5 million or less file annually, those between $1.5 million and $6 million file quarterly, and those above $6 million file monthly.8Canada Revenue Agency. General Information for GST/HST Registrants Smaller businesses can voluntarily elect a more frequent filing period for faster input tax credit refunds. Combined GST/HST rates range from 5 percent in provinces with no provincial sales tax to 15 percent in provinces that harmonize their sales tax with the federal GST.
Payroll Obligations If You Hire
Hiring employees triggers a separate set of tax obligations. You must withhold income tax, Canada Pension Plan contributions, and Employment Insurance premiums from each employee’s pay, and you must also contribute the employer’s share of CPP and EI on top of what the employee pays.
For 2026, the key payroll figures are:
- CPP: Both employer and employee contribute at 5.95 percent of pensionable earnings between the $3,500 basic exemption and the $74,600 maximum, for a maximum contribution of $4,230.45 each. A second-tier CPP2 contribution of 4 percent applies on earnings between $74,600 and $85,000, up to $416 per person.
- EI: The employer rate is 2.282 percent on insurable earnings up to $68,900, for a maximum employer premium of $1,572.30. Employees pay a lower rate, and the employer’s contribution is 1.4 times the employee premium.
These figures come from the CRA’s 2026 payroll deduction tables.9Canada Revenue Agency. T4032 Payroll Deductions Tables 2026
Remittances to the CRA are due by the 15th of the month following the pay period for most employers. Very large employers remit more frequently. Late remittances face escalating penalties: 3 percent if one to three days late, 5 percent if four or five days late, 7 percent if six or seven days late, and 10 percent if more than seven days late.10Canada Revenue Agency. Employers’ Guide – Payroll Deductions and Remittances A second or later failure in the same calendar year, made knowingly or with gross negligence, doubles the penalty to 20 percent. These penalties generally apply only to the amount exceeding $500, but the full amount is penalized if the failure was deliberate.
Which Forms You File
Sole proprietors and partners report business income using Form T2125, the Statement of Business or Professional Activities, filed as part of your personal tax return.11Canada Revenue Agency. Completing Form T2125 The form asks for your nine-digit Business Number and an industry classification code, then breaks down revenue, expenses, CCA, and net income.12Canada Revenue Agency. Business Number and CRA Program Accounts
Corporations file the T2 Corporation Income Tax Return. Every resident corporation must file a T2 each year, even if it has no tax payable, including non-profits, tax-exempt entities, and inactive corporations. For tax years starting after 2023, electronic filing is mandatory for most corporations, with limited exceptions for insurance companies, non-resident corporations, and those reporting in functional currency. Filing a paper return when you are required to file electronically triggers a $1,000 penalty.13Canada Revenue Agency. Corporation Income Tax Return
Filing and Payment Deadlines
Deadlines depend on your business structure.
- Sole proprietors and partners: Your personal tax return is due June 15 of the following year. Any balance owing must be paid by April 30. The extended filing deadline does not extend the payment deadline, so interest starts accruing on May 1 if you owe money, regardless of when you file.14Canada Revenue Agency. Filing Due Dates for the 2025 Tax Return
- Corporations: The T2 return is due six months after the end of the corporation’s fiscal year. A December 31 year-end means a June 30 filing deadline; a March 31 year-end means September 30. Corporate tax balances are generally due two or three months after the fiscal year-end, depending on the corporation’s size and type.
Quarterly Instalments
If you owed more than $3,000 in net federal tax in the current year and in either of the two preceding years, the CRA expects you to make quarterly instalment payments rather than paying everything at year-end.15Canada Revenue Agency. Who Has to Pay – Required Tax Instalments for Individuals Quebec residents hit this trigger at $1,800 instead of $3,000. Individual instalments are due March 15, June 15, September 15, and December 15.
Corporations face a similar threshold. No instalments are required if total federal tax payable is $3,000 or less in either the current or preceding year.16Canada Revenue Agency. Corporation Instalment Guide 2025 Above that amount, most corporations pay monthly. Qualifying Canadian-controlled private corporations with taxable income of $500,000 or less and taxable capital of $10 million or less, including associated corporations, can pay quarterly.17Canada Revenue Agency. Corporate Income Tax Payments – Due Dates for Payments Missing instalment deadlines triggers interest charges that compound daily at the CRA’s prescribed rate, reset every calendar quarter.
Late-Filing Penalties and Interest
The standard late-filing penalty is 5 percent of the unpaid tax when the return was due, plus 1 percent per complete month the return remains outstanding, up to 12 months.18Department of Justice Canada. Income Tax Act – Section 162 This applies to both individuals and corporations.
Repeat offenders face a harsher formula. If you were penalized for late filing in any of the three preceding years and the CRA sent you a demand to file, the penalty jumps to 10 percent of the unpaid balance plus 2 percent per month, up to 20 months.18Department of Justice Canada. Income Tax Act – Section 162 On a $50,000 balance, the maximum repeat-offender penalty reaches $30,000.
Beyond filing penalties, the CRA charges interest on any overdue balance. The prescribed interest rate is updated quarterly and compounds daily.19Canada Revenue Agency. Prescribed Interest Rates Paying at least what you owed last year through instalments is the simplest way to sidestep instalment interest, because the CRA will not charge it if your payments match your prior-year liability.
Keeping Records
The CRA requires every business to maintain complete financial records, including sales invoices, purchase receipts, bank statements, contracts, and any other documents supporting the amounts on your return. Records must be kept for at least six years from the end of the tax year they relate to, unless you get written permission from the CRA to destroy them earlier.20Canada Revenue Agency. Keeping Records The CRA has authority to examine, audit, and review your record-keeping systems at any time, including records held by third parties.
Missing records during an audit means the CRA can disallow the corresponding deductions entirely. Section 230 of the Income Tax Act also provides for penalties when a person fails to keep proper books and records. The practical consequence tends to arrive first: legitimate deductions get denied because you cannot prove them.