Short answer: Estimate corporate income and tax before the fiscal year closes, then review compensation, accrued costs, instalments, and other decisions still open. Once the year has ended, some planning choices are no longer available.
How Corporate Tax Is Calculated
Federal corporate income tax on active business income for a qualifying CCPC operates in two tiers. Income up to the available business limit is eligible for the small business deduction, which reduces the general federal corporate rate to a net rate of 9%. Above the business limit, the net federal rate is 15%, after the 10% federal tax abatement and the general rate reduction.
Provincial or territorial tax is added to the federal amount. Ontario’s lower rate fell from 3.2% to 2.2% on July 1, 2026. Combined with the 9% federal small business rate, eligible income is taxed at 11.2% for a tax year wholly after that date; a year spanning the change uses a day-weighted Ontario rate. Ontario’s higher rate is 11.5%, producing a 26.5% combined general rate when the federal general rate applies. Other provinces have different rates and business limits. Quebec requires a separate calculation: its lower provincial rate must not be assumed automatically for a one-person IT contractor. Use the corporation’s permanent establishment, income allocation, fiscal year and available business limit, not just its jurisdiction of incorporation.
CRA source: Corporation tax rates
CRA source: T2 Corporation Income Tax Guide, Chapter 4
Alberta source: Corporate income tax rates
Revenu Québec source: Small business deduction
The Business Limit and Associated Corporations
The federal small business deduction applies to the first $500,000 of active business income for most CCPCs in a taxation year. Associated corporations share this limit. The most common association for IT contractors is a second CCPC controlled by the same shareholder, or a corporation controlled by a spouse where both meet the association criteria under section 256 of the Income Tax Act. Associated corporations allocate the shared limit on Schedule 23, and the allocation is binding for the year once filed.
For a contractor with a single CCPC and no other corporations, the full $500,000 is typically available. Confirming the absence of association before planning around the full limit avoids a miscalculation.
The Passive Income Grind
A CCPC’s federal business limit is reduced when the corporation and any associated corporations earned significant investment income in the prior taxation year. The reduction is based on adjusted aggregate investment income (AAII) from the preceding year. For every $1 of AAII above $50,000, the current year’s business limit is reduced by $5. At $150,000 or more of AAII in the prior year, the business limit reaches zero and the small business deduction is eliminated entirely.
For a contractor corporation with portfolio investments, AAII generally includes interest earned inside the corporation, foreign dividends, rental income, and the taxable portion of capital gains net of capital losses on passive investments. Certain active-business-related capital gains can be excluded. Canadian dividends received from connected corporations that are deductible under the inter-corporate dividend rules are excluded.
An IT contractor who has accumulated retained earnings and invested them inside the CCPC needs to know whether the passive income grind is reducing the federal business limit. A corporate account holding $1,000,000 in GICs earning 5.5% generates $55,000 in interest, assumed here to be AAII in the prior year. That is $5,000 above the threshold, reducing the current year’s federal business limit by $25,000. If the corporation has at least $500,000 of otherwise eligible Ontario active business income and the full limit would otherwise have been available, $25,000 moves from the 9% federal small business rate to the 15% federal general rate. The additional federal tax is $1,500. Ontario’s small business limit is not reduced by the federal passive-income grind, so this example does not remove the provincial deduction. The result also assumes no other business-limit reduction or allocation.
At $800,000 invested at the same 5.5% return, AAII is $44,000, which remains below the $50,000 threshold and the business limit is unaffected.
The grind applies to the current year’s limit based on the prior year’s AAII. The current-year tax estimate uses the prior year as the input and does not change based on current-year investment decisions. Those current-year investment decisions still matter for next year’s business limit.
The Salary Lever
The most controllable variable in the year-end tax estimate is the compensation decision. Salary paid to the shareholder-employee, or properly accrued before the corporate fiscal year-end and paid or set off against the shareholder loan within the 180-day window under subsection 78(4) of the Income Tax Act, is deductible from corporate taxable income. Each dollar of qualifying salary reduces the income subject to corporate tax.
Additional deductible salary reduces corporate taxable income, but it also creates personal income tax and may create employer and employee CPP costs. Its corporate tax effect depends on which federal and provincial rate tiers apply in that corporation’s fiscal year. Compare the combined effect, including eventual dividend taxation on amounts retained, rather than treating the corporate deduction as a net saving.
Revenue and operating expenses are largely fixed by the time the year-end conversation happens. The salary or bonus decision is what moves the corporate tax number before the year closes. The salary vs dividend guide covers how the integration calculation works.
A Worked Estimate
An Ontario CCPC expects $220,000 of accounting profit before owner compensation. Prior-year AAII was $32,000 and there are no associated corporations. Before comparing $80,000 and $120,000 of salary, reconcile accounting profit to taxable income, calculate employer CPP and any other payroll cost, confirm the fiscal year and available business limit, then run the owner’s 2026 personal return for each scenario. The salary difference is $40,000, but the corporate deduction, payroll cost and personal tax do not move by one common rate. This is why a rate-only worked example would misstate the result.
The Ontario incorporation estimator illustrates a narrower 2026 calendar-year, salary-only case. A year-end compensation decision needs the actual corporate and personal facts, including any dividends, RRSP deductions and other income.
Instalment Alignment
Once the estimated T2 liability is established, it should be compared to the total corporate instalments paid during the year. If instalments fall short, arrears interest has been accruing from each missed instalment date. A voluntary payment made before or after the fiscal year-end reduces the balance owing at filing but does not recover arrears interest that has already run. Knowing the shortfall two or three months before the fiscal year closes allows a corrective payment that limits the total interest exposure.
The three methods for calculating required instalment amounts, prior year, second-prior year, and current year, are covered in the quarterly tax instalment guide. For a CCPC whose income varies significantly year over year, the current-year method requires an accurate estimate, which is precisely what the year-end calculation provides.
Refundable Dividend Tax on Hand
A CCPC that earns passive investment income pays an elevated Part I tax rate on that income, with a portion credited to notional refundable dividend tax on hand (RDTOH) accounts. The credit is recovered as a dividend refund when the corporation pays taxable dividends in the taxation year, subject to the eligible and non-eligible RDTOH rules. The refund reduces the effective tax cost of passive income earned inside the corporation but requires a dividend to trigger the release.
For a contractor whose CCPC has accumulated RDTOH from prior-year investment income, the year-end estimate should include whether there is an eligible or non-eligible RDTOH balance and whether declaring a taxable dividend in the year would trigger a recovery. The refund is not automatic, it requires a taxable dividend and the dividend refund calculation on the T2, with normal T5 reporting for dividends paid to the shareholder. In most cases the RDTOH consideration is secondary to the salary-vs-dividend integration analysis, but it can shift the effective cost of dividends when balances are material.
Quebec Note
A Quebec CCPC files both a federal T2 and a provincial CO-17. The Quebec small business deduction is a separate provincial calculation with its own eligibility rules and can be reduced or unavailable. A one-person IT contractor must verify Quebec eligibility and rates directly rather than borrowing an Ontario calculation. The instalment obligation to Revenu Québec runs on its own schedule, separate from the CRA instalment requirement.
A year-end tax estimate for a Quebec CCPC requires two parallel calculations: one for CRA and one for Revenu Québec. The inputs are largely the same, but the rate structure, eligible-income determination, and instalment comparison are done independently for each.
The corporate tax estimate is not a filing exercise. It is the calculation that gives the year-end review its practical content. A compensation decision made with current numbers produces a different outcome than one made with last year’s numbers or none at all. The year-end review guide covers the timing and structure of the planning conversation; this guide covers what the numbers behind it look like. The estimate is also the point to confirm the fiscal year-end date itself has not drifted from what the corporation’s other filings assume.