The year-end review is when the planning conversation happens. This guide is about the calculation that underpins it. Knowing what the corporation will owe at filing time, before the fiscal year closes, is what makes the compensation and timing decisions more than educated guessing. The calculation requires three inputs: the corporate income for the year, the applicable rates, and the variables that still remain adjustable before the year closes.
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 applies 3.2% on income eligible for the small business deduction and 11.5% on income above the business limit. The combined rate on eligible income in Ontario is 12.2%. The combined rate above the business limit is 26.5%. British Columbia and Alberta apply a 2% lower rate, giving a combined rate of 11% on eligible income. Quebec requires a separate calculation: the lower provincial rate can be 3.2% when the Quebec small business deduction conditions are met, but it should not be assumed automatically for a one-person IT contractor. The estimation requires the correct provincial or territorial rate for the corporation’s permanent establishment and income allocation, 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 available business limit. A corporate account holding $1,000,000 in GICs earning 5.5% generates $55,000 in AAII. That amount exceeds the $50,000 threshold by $5,000, reducing the current year’s federal business limit by $25,000. In Ontario, $25,000 of active business income that would have been taxed at 12.2% is instead taxed at 26.5%, an additional $3,575 in combined tax.
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.
At a combined SBD rate of 12.2% in Ontario, reducing corporate income by $10,000 through additional salary saves $1,220 in corporate tax. The same $10,000 is added to the shareholder’s employment income on the T1 and taxed at the applicable personal marginal rate. Whether the combined tax result of that shift is favourable depends on the personal marginal rate on that increment, the integration of dividends, and the shareholder’s full personal income picture including other sources.
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 with $220,000 in accounting net income before year-end compensation decisions. Prior year AAII was $32,000, below the $50,000 threshold. No associated corporations. All income is active business income.
Option A — $80,000 salary: Corporate taxable income is $140,000. Tax at 12.2% (within the SBD) = $17,080.
Option B — $120,000 salary: Corporate taxable income is $100,000. Tax at 12.2% = $12,200.
The additional $40,000 of salary in Option B reduces corporate tax by $4,880. That $40,000 appears as employment income on the T1. Using the 2026 federal and Ontario brackets, including Ontario surtax, for an Ontario resident with no other income in this example, the move from $80,000 to $120,000 of salary produces about $13,100 of additional federal-Ontario personal income tax before CPP, EI, and other personal adjustments. The net increase in combined tax from the shift is therefore about $8,220 before those payroll and personal items.
Whether Option A or Option B produces the better integrated result depends on the shareholder’s full personal income, RRSP room available, CPP contribution objectives, and whether income splitting through dividends is available. The estimate is what anchors that analysis to real numbers rather than approximations.
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. The lower provincial rate can be 3.2% on eligible income when the Quebec conditions are met, but the Quebec deduction has its own eligibility rules and can be reduced or unavailable. A Quebec estimate for a one-person IT contractor should specifically check the Revenu Québec small business deduction rules before using an Ontario-like 12.2% combined rate. The instalment obligation to Revenu Québec runs on its own schedule and calendar, 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.