Introduction
When a Canadian corporation pays tax, it pays two taxes simultaneously: federal corporate income tax (to the CRA, on behalf of the federal government) and provincial corporate income tax (also remitted through the CRA, but attributed to Ontario). Most business owners see one T2 return and one tax payment — but there are two rates operating in the background.
The Federal Corporate Tax Rate
The base federal corporate income tax rate is 28%. The federal small business deduction reduces this to 9% on the first $500,000 of active business income for CCPCs. The federal general rate abatement reduces the base rate by 10% for provincial income, producing a net federal rate of 15% at the general rate.
For a CCPC earning within the SBD limit: 9% federal. For income above the SBD limit: 15% federal.
The Ontario Corporate Tax Rate
Ontario's provincial corporate income tax rate is:
2.0% provincial small business rate (applying to SBD-eligible income)
11.5% general provincial rate (applying to income above the SBD limit)
Ontario's provincial rate is in addition to — not instead of — the federal rate.
The Combined Rates
Income Type | Federal | Ontario | Combined
SBD-eligible active income (up to $500K) | 9.0% | 3.2%* | 12.2%
General rate income (above $500K) | 15.0% | 11.5% | 26.5%
Passive investment income | 38.67%** | 11.5% | 50.17%
*Ontario's SBD rate is effectively 3.2% after surtax adjustments.
**The federal passive rate includes the additional refundable tax (Part I.3 and Part IV), which is refundable on dividend payments through the RDTOH mechanism.
Why the General Rate Is So Much Higher
The 14.3 percentage point difference between the SBD rate (12.2%) and the general rate (26.5%) reflects two policy choices:
First, the SBD is a deliberate incentive for CCPCs — rewarding small, Canadian-controlled businesses with a lower rate on the first $500,000 of active income.
Second, the general rate approximates the integrated rate at which a corporate and personal combination of tax should equal the personal marginal rate on employment income. The general rate ensures that leaving money in the corporation at the general rate and distributing it as eligible dividends produces approximately the same total tax as earning the income personally.
The Provincial Credit Mechanism
When a corporation earns active business income, the federal government allows a 10% abatement of the base 28% federal rate — specifically because the provinces are taxing the income as well. Without this abatement, the combined federal-provincial rate would be unworkably high. The abatement ensures the federal portion is reduced to account for provincial taxation.
Why This Matters Practically
Understanding the two-layer structure matters when comparing corporate rates across provinces — as discussed in Article 153. Alberta's provincial general rate of 8% (vs. Ontario's 11.5%) produces a combined general rate of 23% in Alberta vs. 26.5% in Ontario — a meaningful difference for corporations with significant income above the SBD limit.
It also matters when reading CRA publications or government announcements about corporate tax changes — knowing whether a proposed change affects the federal rate, the provincial rate, or both determines its actual impact on the combined rate.
When to Speak With a CPA
For most incorporated professionals, the combined rate is a background factor in compensation planning — knowing that SBD income at 12.2% and passive income at 50.17% produce very different after-tax results. A CPA translates these rates into specific dollar impacts for the corporation's actual income mix.
Rotaru CPA explains and applies Ontario and federal corporate tax rates in context for all incorporated clients. Book a consultation to review your corporation's combined tax position.