One of the most important tax advantages available to small businesses is the Small Business Deduction, which can potentially reduce the applicable Federal tax rate from as high as 28% to as low as 10.5%.

Canadian-controlled private corporations ("CCPCs") are entitled to claim a small business deduction on active business income ("ABI") earned in Canada.

Active business includes a business where income is actively earned by employees carrying on work in Canada. The definition of ABI excludes businesses that derive their income from property and have less than six full-time employees, in addition to businesses that provide "personal services" through a corporation and have fewer than six full-time employees.

The small business deduction provides for a 10.5% federal tax rate on up to the first $500,000 of a CCPC's taxable income or ABI.

The provinces also have their own small business rates which vary from Province to Province.

The ability for larger corporations to claim the small business deduction is reduced.