Updated Checked by the Tax-Services.ca editorial team How we check
Taxable capital employed in Canada is a measure of how much capital a corporation uses in the country, and it matters to a small business for one reason. Once the taxable capital of a Canadian-controlled private corporation (and any corporations associated with it) passes $10 million, the federal small business limit starts to shrink. At $50 million it’s gone. Below $10 million you can ignore the whole idea.
What does taxable capital employed in Canada mean?
It’s the figure the CRA asks for on Schedule 33, which is called Taxable Capital Employed in Canada, Large Corporations. You file that schedule when the corporation and its related corporations have more than $10 million of it. It isn’t a tax you pay. It’s a size test that decides how much of the small business rate you keep.
Most owner-managed companies never get near it. A corporation with $500,000 of profit is a small business by any normal measure, and the test only bites for groups with heavy capital behind them, such as holding structures or companies with big balance sheets.
| Federal point | Figure |
|---|---|
| Business limit, one corporation | $500,000 |
| Taxable capital where the limit starts to fall | Over $10 million |
| Taxable capital where the small business deduction ends | $50 million or more |
| Net federal rate on income within the limit | 9% |
| General federal rate | 15% |
| Passive income that starts shrinking the limit | $50,000, nil at $150,000 |
The 9% and 15% rates and the $500,000 limit are on the CRA’s corporation tax rates page, which also shows that a few provinces use a higher limit than $500,000, Nova Scotia at $700,000 among them.
How does the limit shrink between $10 and $50 million?
The CRA describes the reduction as straight-line. On that basis, a corporation halfway through the range, at $30 million, would keep about half of the $500,000 limit, or $250,000. That’s our reading of “straight-line”, so use Schedule 33 for the exact formula on a real return.
Here’s what it costs on $500,000 of active business income, using the 9% and 15% federal rates. With the full limit, federal tax is $45,000. With a $250,000 limit it’s $60,000, because the second $250,000 is taxed at 15%. With no limit it’s $75,000. Provincial tax comes on top and depends on where the company is.
Ballpark thinking helps here: every $100,000 of limit you lose costs about $6,000 of federal tax a year, since that slice moves from 9% to 15%.
Which corporations get counted together?
Associated corporations share a single limit. They file Schedule 23 to split it, and the percentages can’t add to more than 100%. For the capital test the CRA looks at the group, so a small company owned by a family holding company can be caught by its associates’ capital as well as its own.
There is a second reduction that has nothing to do with capital. When the corporation and its associates earn between $50,000 and $150,000 of passive investment income, the limit shrinks, and it reaches nil above $150,000. The CRA applies the larger of the two reductions, not both added together.
Where does this show up in your planning?
If you’re far below $10 million, nowhere. You do need to watch the passive income side, which reaches smaller companies. If you’re near the range, the gap between 9% and 15% is worth up to $30,000 a year on the $500,000 limit, so a corporate accountant is worth the fee at that scale.
Picture Dev, who owns an engineering firm in Calgary through a holding company that also owns a few investment properties. His operating company is small, but the rent and interest piling up in the holdco count toward the passive income test, and the group’s combined capital counts toward the capital test. The CRA looks at the associated companies together, not the engineering company alone.
For a quick estimate of corporate tax use the corporate tax calculator. It ignores the taxable capital test, so it overstates the small business benefit for a large group. Owners who pay themselves in dividends can test that side with the dividend tax calculator, and the income tax calculator shows salary instead.
What mistakes come up with taxable capital?
Forgetting related corporations is the usual one. Filing Schedule 33 late or not at all when you’re over the line is another, and so is assuming the test looks at one company only.
And provincial small business rules differ. Some provinces follow the federal limit and others set their own, so a federal reduction may not carry over.
What this page is based on
The $500,000 limit, the $10 million to $50 million range, the straight-line reduction, the passive income band and the Schedule 33 and Schedule 23 rules come from the CRA‘s T2 corporation guide and corporate tax rate pages. The 9% and 15% rates come from the CRA’s corporation tax rates page. The worked figures are our arithmetic, not CRA output, and apply to federal tax only. This is an independent information site, not connected to the CRA.
Frequently asked questions
What is taxable capital employed in Canada?
It's the capital figure reported on CRA Schedule 33 for a corporation and its related corporations. It decides whether the small business limit is reduced.
At what level does the small business limit start to shrink?
Above $10 million of taxable capital for the corporation and its associated group, per the CRA T2 guide.
When is the small business deduction lost entirely?
At $50 million or more of taxable capital, the CRA says the corporation doesn't qualify.
Do passive income and taxable capital reductions add up?
No. The CRA applies the greater of the two reductions.
Does the corporate tax calculator apply this test?
No. It ignores taxable capital, so treat it as an estimate for small companies.
- How Canadian income tax works: brackets and credits
How federal and provincial Canadian income tax stack up, what marginal and average rates mean, and how credits and deductions change your bill