How does the Small Business Deduction apply to my Ontario dental practice?
An Ontario Dental Professional Corporation (DPC) is a Canadian-controlled private corporation and qualifies for the Small Business Deduction under ITA s. 125 on the first $500,000 of active business income earned in Canada. Combined 2026 Ontario + federal SBD rate: 12.2%. General rate above the SBD limit: 26.5%. The $500,000 is shared across associated corporations and reduced by the passive-income and taxable-capital grinds.
Common DPC pitfalls with SBD. Pitfall 1: dental hygiene services performed under the DPC where the hygienist is an independent contractor rather than employee – can jeopardize SBD if the arrangement looks like a Specified Investment Business (SIB) rather than active business. Pitfall 2: excess retained earnings invested in portfolio investments create AAII that grinds the SBD from year 2 onward. Pitfall 3: an associated group (dentist owns both DPC and a real estate rental corp) shares the $500,000 limit.
Example: an Ontario DPC generates $700,000 net active business income and holds $1.5M in a portfolio inside the DPC. Portfolio generates $60,000 interest income. AAII = $60,000, exceeds threshold by $10,000; SBD limit reduced by 5 x $10,000 = $50,000. Business limit becomes $450,000. First $450,000 at 12.2% = $54,900 tax; next $250,000 at 26.5% = $66,250 tax; total federal+Ontario corporate tax about $121,150.
Practical mitigation. Distribute excess cash to a Holdco to insulate the DPC’s SBD from Holdco-held passive investments; note this only helps if DPC-and-Holdco are structured to avoid the associated grouping trap.
Note: The Ontario 3.2% small business rate is unchanged for 2026. Confirm annually at ontario.ca as provincial rates are periodically reviewed.
Source: canada.ca â Small business deduction
— Bader A. Chowdry, CPA, CA, LPA — Insight Accounting CPA
Disclaimer: Bader A. Chowdry, CPA, CA, LPA is a Licensed Public Accountant regulated by CPA Ontario. Insight Accounting CPA Professional Corporation is a Chartered Professional Accountant firm. This content is general information only and does not constitute professional advice for your specific facts. Confirm current rules and figures with your own advisor before acting.