It is important to make sure you are eligible before you claim the small business deduction. The Canada Revenue Agency (CRA) considers the specific facts of each case in order to determine eligibility, and a reassessment may be completed to disallow the small business deduction if you are not entitled to claim it. 

 

To be eligible to claim the small business deduction, you must be a Canadian-controlled private corporation carrying on a business in Canada throughout the year and meet at least one of the following conditions: 

• You primarily earn active business income rather than income from a specified investment business or a personal services business
• You are a specified investment business or a personal services business that employs more than five full-time employees throughout the year.
• You are a specified investment business and you have an associated corporation that provides managerial, financial, administrative, maintenance, or other similar services to your corporation while carrying on an active business and you would have to hire more than five full-time employees to do this work if your associated corporation did not do it. 

Corporations have to file a T2 Corporation income tax return within six months of the end of their tax year. If your corporation is located in Quebec or Alberta, you have to file a separate provincial corporation return. For more information on how to claim the small business deduction, go to Chapter 4 of the T2 Corporation – Income Tax Guide.