The 2023 small business tax changes you need to know about

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If you run your own business, you need to know about small business tax changes for the 2023 fiscal year.

With the COVID-19 pandemic waning, the Canada Revenue Agency (CRA) has closed access to wage and rent subsidies.

You can no longer apply for these subsidies as of November 4, 2022.

There are both tax hikes and breaks to be aware of that can impact your bottom line:

  • Source deductions will rise
  • Limits to interest deductions on financing will appear in 2023

However, there are also favourable changes to several business expenses that you can take advantage of, most notably the expansion of the small business deduction (SBD).

The changes you should know for 2023

When you own a small business, every penny counts. Be sure to assess how your operation will be affected by the following tax changes:

Let’s look at these one at a time, starting with the biggest one first.

1. Small business deduction enhancement

The first small business tax change you should know about is the expansion of the small business deduction (SBD).

This deduction is available strictly for Canadian Controlled Private Corporations (CCPCs).


The 2022 Federal Budget unveiled new legislation through Bill C-32 to provide more tax relief for corporations under the SBD.

Previously, the SBD allowed corporations to pay a reduced tax rate on up to $500,000 of active business income, resulting in tax savings of up to $30,000 annually. However, this deduction would decrease in value once the CCPC’s total taxable capital exceeded $10 million, phasing out entirely at the $15 million mark.

Under the revised rule, the upper limit of taxable capital increases to $50 million for taxation years beginning on April 7, 2022. As a result, if your business qualifies as a CCPC whose taxable capital has extended past $15 million, you can still claim the SBD, allowing you to keep more money in your pocket.

Editor’s note: If your business doesn’t have a website, consider using your 2022 tax savings to build one. It’s one of the best long-term investments you can make.

2. Changes to EI premiums

Since 2020, the cost of EI (employment insurance) premiums has remained steady at 1.58% as the Government of Canada imposed a temporary rate freeze at this level.

However, in 2023, employers will need to pay more as the new EI rate has risen to 1.63%.

This five-cent raise is the maximum allowed annually under federal legislation.

If you own a business, you will need to account for this rate hike in your 2023 budget, as it will reduce your profit.

3. Changes to the CPP

Much like in the past few years, Canada Pension Plan (CPP) contributions are again rising.

The ongoing increases result from the federal government’s CPP enhancement plan, which seeks to raise CPP rates to 14% by 2025.

As of 2023, the maximum pensionable earnings for the CPP increase are $66,600, a jump from $64,900 in 2022.

With that change, the employee and employer contribution rates will be 5.95%, up from 5.70% in 2022.

As a business owner, you may be expected to make CPP contributions on your employee’s behalf.

4. New limits on auto deduction & expense benefit rates

Have you recently purchased a vehicle (or two) for your small business? If so, the Government of Canada has instituted the following deduction limits and benefits, all effective January 1, 2023:

  • The ceiling for capital cost allowance (CCA) for new and used passenger vehicles that belong to Class 10.1 has increased from $34,000 to $36,000.
  • The CCA ceiling for new and used Class 54 zero-emission passenger vehicles has increased from $59,000 to $61,000. Note: You only qualify if you have not received a government rebate.
  • Tax-deductible leasing costs have risen from $900 to $950 per month for new leases entered into on or after January 1, 2023.
  • The tax-exempt allowance paid to employees who use their personal vehicle for business-related activities has increased from 68 cents per kilometer for the first 5,000 kilometers driven and 62 cents for every kilometer after that.
  • The general prescribed rate paid to employees has risen from 29 cents to 33 cents per kilometer.

Electric car plugged in to charging station

5. Air quality improvement tax credit

During the pandemic, businesses across Canada upgraded their ventilation and air filtration systems to keep their premises safe for their employees. In response, the Government of Canada instituted the temporary Air Quality Improvement Tax Credit to provide some financial relief.

Business owners can claim up to 25% of the total cost spent on improving the air quality in your building.

Eligible expenditures include both HVAC systems and standalone air filtration devices.

To qualify for this refundable tax credit, you must:

  • Have incurred the expense between September 1, 2021, and December 31, 2022Workman installing an air conditioner
  • Be an unincorporated sole proprietorship or CCPC with taxable capital of no more than $15 million in the prior tax year

The maximum deduction allowed is $10,000 at each eligible location, with a maximum of $50,000 for all locations.

If you incurred considerable costs to revamp your building’s air quality, ensure you take advantage of this tax credit. To claim it, you must complete and submit form T2SCH65 with your tax return.

6. Change to the tax-free savings account contribution limit

Do you maintain a tax-free savings account (TFSA) for your small business?

You’ll be thrilled to hear that the annual contribution limit in 2023 has increased from $6,000 to $6,500.

This increase is the first contribution room hike since 2019, so remember to top up your account if you have some idle cash lying around.

7. New limits on interest deductions

As a business owner, you can generally deduct all interest charges you incur to finance your expenses. However, the Department of Finance Canada has proposed new rules that will cap the amount of interest you can claim when filing your taxes.

The new rules, referred to as the Excessive Interest and Financing Expenses Limitation (EIFEL), limit tax-deductible interest and financing expenses to 30% of adjusted taxable income (with some exceptions). Adjusted taxable income is generally earnings before interest, taxes, depreciation, and amortization (EBITDA).

Given the current environment of rising interest rates, it’s vital to review these changes and assess how they may impact your business’s bottom line, especially if yours relies heavily on financing. You may need to rearrange your financing deals.

Starting a Business Advisor

The rules are complex, so it’s wise to plan early and consult a tax specialist to help you navigate them.

The new rules come into effect for tax years beginning on or after October 1, 2023.

Make the most of the small business tax changes

Despite the extra burden of increased source deductions, there is still plenty of small business tax relief to enjoy.

Talk to your accountant about how you can take advantage of:

  • New rules surrounding automobile deductions
  • The air quality improvement tax credit
  • Adapting to changes in the deductibility of interest and financing expenses

If your business is expanding, the higher threshold for the SBD will accommodate your growth, too, allowing you to save some extra money.

Stay on top of your tax deadlines and make sure you take full advantage of new small business tax changes.  Not all are beneficial, but some will provide financial relief, so always plan to maximize your deductions.

Smart tax planning will ensure more of your money stays with your business rather than going to the Canada Revenue Agency.

UPDATE: This small business tax changes post was originally published on 17 April 2019 and was updated on 8 May 2020 and again on 6 April 2023.