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A subsidiary company is its own taxpayer. Its profit is taxed in the subsidiary at federal and provincial corporate rates, it files its own T2 return, and if it and its parent are associated Canadian-controlled private corporations, they share a single $500,000 small business limit. That last rule is where most of the money is.
Does a subsidiary pay tax separately from its parent?
Yes. Each corporation is a separate legal person, so each one files a T2 electronically (for tax years starting after 2023, with exceptions such as insurance and non-resident corporations). Missing the online requirement carries a $1,000 penalty. The return is due six months after the year end, and the balance owing is due earlier, two months after year end, or three months for an eligible CCPC. The CRA’s T2 Corporation Income Tax Guide sets out both dates.
You’ll see each company’s profit taxed on its own return, not folded into the parent’s. Dividends and reorganizations between the two follow separate rules that this page doesn’t cover.
What tax rates does a subsidiary pay?
Federally, the general corporate rate is 15%. A Canadian-controlled private corporation gets a small business rate of 9% on its first $500,000 of active business income. Foreign-owned subsidiaries are not CCPCs, so they don’t qualify for the lower rate at all.
| Item | Figure |
|---|---|
| Federal general rate | 15% |
| Federal small business rate (CCPCs) | 9% on the first $500,000 |
| Small business limit, associated group | $500,000, shared |
| Limit starts to shrink (taxable capital) | $10 million, gone at $50 million |
| Limit starts to shrink (investment income) | $50,000, gone at $150,000 |
| Ontario general rate | 11.5% provincial, 26.5% combined |
Ontario’s small business rate is falling from 3.2% to 2.2% from July 1, 2026. For a calendar 2026 year our calculator uses a blended 2.70%, which we worked out by days and which no official page states. Treat any Ontario 2026 small business figure as a ballpark. The corporate tax calculator lets you try each province.
How do associated corporations share the small business limit?
This is the one that catches you if you add a subsidiary hoping for a second $500,000. Associated CCPCs share one limit. They divide it on Schedule 23 of the T2, and by our reading of the CRA’s form, if they don’t file that agreement the limit is nil for all of them.
Here’s a case using federal rates only. A parent and a subsidiary each earn $300,000 of active business income, so $600,000 together. As associated CCPCs they share the $500,000. Federal tax is $500,000 at 9% plus $100,000 at 15%, which is $60,000. If each had its own full limit, it would be $600,000 at 9%, or $54,000. The difference is $6,000 a year, before provincial tax.
How the group carves up the limit doesn’t change that total. Give each company $250,000: each pays $22,500 on the first $250,000 and $7,500 on the remaining $50,000, so $30,000 each and $60,000 overall. The split matters when one company earns far less than its share, because unused room can go to the other.
The limit also shrinks if the group has $10 million to $50 million of taxable capital, or investment income above $50,000. Which corporations count as associated depends on control, and the CRA’s rules for that are detailed. Check them before you assume two companies are separate for this purpose.
What about transactions between related companies?
If the other party is a non-resident, the CRA’s form T106 comes into play for transactions with non-arm’s length non-residents. For tax years starting in 2022 or later, the CRA’s de minimis policy lets you skip the detailed Part III reporting for a non-resident when your total transactions with that person are under $100,000. The return itself is still there. For the wider filing thresholds, read the CRA’s T106 page.
Wages paid by a subsidiary go through its own payroll account, and the payroll remittance calculator gives a feel for the CPP and EI it owes. Salary or dividend to an owner is a different question, and the dividend tax calculator shows what a dividend costs the person receiving it.
What should you set up when you form a subsidiary?
Start with the basics. Open separate bank accounts, so a customer’s cheque never lands in the wrong company. Get a payroll account and a GST/HST account in the subsidiary’s name if it will have staff or sell taxable goods. Write down any loans or services between the companies, with the amount, the terms and the start date. Then put the year end and the T2 due date in the calendar, since the new company has its own.
Where do subsidiaries go wrong?
Three usual slips. Owners forget that a new company shares the limit rather than adding one. They file Schedule 23 late or not at all. And they let related companies trade with each other with nothing in writing.
A structure involving foreign parents, share sales or moving assets between companies is the point to pay a tax lawyer or CPA, since those rules are technical and mistakes are expensive.
Sources, and how we checked them
Federal rates, the $500,000 limit and the phase-out ranges come from the Canada Revenue Agency‘s corporation tax rates page and T2 guide. The Ontario rates are from the CRA’s Ontario page. The T2 filing rule and T106 policy are CRA pages as well. All were read in September 2026, and the example uses federal rates only. This site isn’t connected to the CRA or any government.
Frequently asked questions
Does a subsidiary file its own tax return?
Yes. Each corporation files its own T2, and for tax years starting after 2023 it must be filed electronically unless an exception applies.
Does a subsidiary get its own small business limit?
Not if it is associated with other CCPCs. The group shares one $500,000 limit, divided on Schedule 23.
What is the federal tax rate for a subsidiary?
The general federal rate is 15%. A CCPC pays 9% on its first $500,000 of active business income.
Does a foreign-owned subsidiary get the small business rate?
No. The lower rate is for Canadian-controlled private corporations.
When is the T2 due?
Six months after the year end. The balance owing is due earlier, two months after year end, or three months for an eligible CCPC.
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