Québec's 5,500-hour rule: could your company lose the small business tax rate?

Short answer: in Québec, a corporation only gets the provincial small business deduction if it paid for at least 5,500 hours of work in the year or in the previous year. Below that, the Québec part of your tax on business income can almost quadruple. Small corporations with one owner and few or no employees are the ones most often caught.

Why it matters

On active business income up to $500,000, a qualifying corporation pays 3.2% Québec tax instead of the general 11.5% rate. (For taxation years beginning after April 29, 2026, the reduced Québec rate drops to 2.2%.)

Example: on $100,000 of profit, that's $3,200 of Québec tax with the deduction, versus $11,500 without it: $8,300 more per year. The federal small business rate (9%) isn't affected by this rule.

How the rule works

  • 5,500 hours or more: full Québec small business deduction.
  • Between 5,000 and 5,500 hours: partial deduction, reduced on a sliding scale.
  • Under 5,000 hours: no Québec small business deduction.

The hours can be counted for the current taxation year or the previous one. 5,500 hours is roughly three full-time people.

Which hours count

  • Paid hours of employees, full-time or part-time.
  • A maximum of 40 hours per week per person.
  • Hours worked by shareholders can count, in some cases even if they aren't paid. The conditions depend on how many shares the person holds.
  • Hours of associated corporations can be added in, under certain conditions.

Corporations in the primary and manufacturing sectors have a separate test based on the share of their activities in those sectors.

What you can do

  1. Count your hours now, before your year-end, including the owners'.
  2. Look at the previous year too: if last year met the test, this year can qualify.
  3. Pay family members who really work in the business a reasonable salary through payroll; their hours count.
  4. Check associated companies you or your family own.
  5. If you can't reach the threshold, your salary-versus-dividend strategy probably needs to change (see our article on salary or dividends).

Not sure where your company stands?

Book a free 30-minute session at soleraaccounting.ca/rendez-vous or call 450 612-7223. We'll check your hours and estimate the impact before your year-end. Service in French, English and Arabic.

This article is general information, not personalized tax advice.

Sources

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