Quebec SBD: The 5,500-Hour Rule to Qualify for the Small Business Deduction

Do you operate an incorporated business in Quebec? You’ve likely heard of the Small Business Deduction (SBD). This provincial Quebec tax measure applies to the first $500,000 of active business income and reduces your provincial corporate tax rate, helping you save thousands of dollars every year.

To benefit, you first need to understand Quebec’s 5,500-hour rule, the key eligibility criteria that determines whether your corporation can access the reduced tax rate.

In this clear, up-to-date guide, we explain what the Quebec Small Business Deduction is, its connection to the federal deduction, and what you need to know about the number of hours worked criterion. You’ll learn which employees and shareholders count, how to keep financial proof, and how to stay compliant with your tax obligations to Revenu Québec.

What is the Small Business Deduction (SBD) in Quebec?

The Quebec Small Business Deduction allows Canadian-controlled private corporations (CCPCs) to access a lower provincial tax rate on their first $500,000 of active business income. The goal, support Quebec small businesses, often medium-sized in growth, by rewarding investment and employment.

In 2025, the combined corporate tax rate on this threshold is approximately 12.2%:

• 9% federally (via the federal small business deduction),
• 3.2% provincially (via the Quebec SBD).

Unlike the federal Small Business Deduction (SBD), the Quebec SBD is not automatic. It depends directly on the criterion tied to the SBD calculation of 5500 paid hours during the taxation year.

The 5,500-Hour Rule: How It Works

The Quebec Small Business Deduction rules determine whether your company qualifies for the reduced rate. To receive the full deduction, your corporation must total at least 5,500 paid hours during the fiscal year. The law also provides a linear reduction between 5,000 and 5,499 hours. Below 5,000 hours, no deduction applies.

Hours must be paid and actually worked, with a cap of 40 hours per week per employee in the calculation. If your fiscal year is shorter than 12 months, the regulatory threshold is pro-rated.

These are the core Quebec Small Business Deduction rules that determine whether your business qualifies for the reduced rate.

You can also use hours from the previous taxation year by adding those of associated corporations for that prior-year test only. Note that this aggregation does not apply to the current year.

Which Hours Count Toward the Small Business Deduction?

All paid hours of eligible employees can be included, up to 40 hours per week per person. This includes:

• Full-time and part-time employees
• Seasonal employees (if hours are paid)
• Active shareholders, under certain conditions

To meet the Quebec Small Business Deduction hours requirement (the 5,500 hours SMB Quebec threshold), you need to understand a few key distinctions. Subcontractors or external self-employed workers are not included, since they’re not considered an employee of the corporation. Ignoring this rule can cause issues when filing your corporate income tax return.

Do a Shareholder’s Hours Need to Be Paid?

To be included in the calculation, a shareholder’s worked hours must be paid. However, the rule differs for majority and minority shareholders.

Majority Shareholder Hours

A majority shareholder holds more than 50% of voting shares, directly or indirectly. According to Revenu Québec, their hours can be counted toward the 5,500-hour total even if they receive no salary or are paid below the fair value of their contribution.

In other words, salary is not determinative for a majority shareholder, what matters is real, active participation in the business.

Be realistic, though. A majority shareholder with several corporations cannot claim more hours than exist in a week; auditors will review plausibility across related entities.

Minority Shareholder Hours

For a minority shareholder (less than 50% of voting shares), the rule is different. Their hours can also be counted toward the 5,500-hour threshold, but only if they are paid.

The salary must be at least the minimum wage, unless an exception applies under the Act respecting labour standards. The minority shareholder must also be recognized as an employee, an applicable condition for eligibility.

Special Cases: Short Years, Amalgamations, Partnerships & Sectors

Some situations require special treatment. Here are the most common ones:

1. Short Taxation Year

If your fiscal year is less than 12 months, the 5,500-hour threshold is pro-rated.

• Example: 9-month year → 5,500 × 9/12 = 4,125 hours.

This ensures fairness regardless of fiscal year length.

2. Amalgamated Corporations

A corporation formed by amalgamation may consider the hours of predecessor corporations for the previous-year test to maintain SBD continuity.

Those hours cannot be counted for the current year; the new entity must meet the 5,500-hour requirement on its own.

3. General Partnerships (SENC) and Co-Employment

A general partnership (SENC) cannot directly claim the corporate SBD. However, hours worked by employees of a partnership may be recognized in the calculation of an associated corporation if:

• the corporation is a co-employer;
• a written mandate clearly states the work arrangement;
• source deductions are made under the correct entity;
• the allocation of hours is documented and traceable.

This is useful in groups where employees are shared across entities in the same industry.

4. Manufacturing or Primary Sector Corporations

Some corporations can access the SBD without reaching 5,500 hours if a significant share of their activity comes from the manufacturing or primary sector (agriculture, forestry, fishing, mining).

• ≥ 50% eligible activity: full SBD;
• 25%–50%: reduced SBD (proportionate);
• < 25%: not eligible.

This alternative test helps asset-intensive businesses with limited headcount.

Practical Examples

Here are a few real-world scenarios showing how the rule applies:

1. 5,200 hours: close to the threshold. The corporation receives a partial deduction at roughly 40% of the reduced rate.

2. 4,900 hours: no SBD: since the 5,000-hour minimum is not met. The corporation receives a partial tax relief at roughly 40% of the reduced rate.

3. Majority shareholder worked 2,000 hours: with the 1.1 conversion factor, that equals 2,200 deemed hours. Countable if documented and realistic.

4. Manufacturing SME with 35% primary-sector activity: reduced SBD according to the eligible proportion, useful for low-labour, high-equipment operations.

5. Amalgamated corporation: may add predecessor hours for the previous-year test; current-year hours must be measured separately.

Small gaps of a few hundred hours can shift your corporation from a reduced to a general rate. Consistent hour tracking is key to optimizing your tax outcomes.

How to Document Your 5,500 Hours Properly

Revenu Québec may request detailed evidence during an audit. To understand official documentation and SBD calculation requirements, consult the form CO-771.CH – Small Business Deduction.

Keep the following probative documentation on file:

• Signed timesheets for all employees and shareholders;
• Employment contracts or co-employment mandates;
• Payroll registers and source deduction records;
• Weekly hour summaries (respect the 40 h/week per employee cap);
• Supporting documents in the event of an amalgamation.

Pro tip: Track hours monthly, not annually. This simple habit helps you see if you’re approaching the critical 5,500-hour threshold and adjust early. Good tax planning helps you reduce your company's taxes and frees up cash flow for growth.

T2inc.ca can help you apply the SBD correctly in your corporate return

The paid-hours test for the Quebec SBD is more than a technical detail. It’s a powerful lever for businesses that plan human resources strategically. It directly affects your provincial corporate tax rate. A corporation that qualifies for the reduced rate pays about 9% less on its first $500,000 of active business income (taxable income), that’s over $45,000 in potential annual tax savings.

The measure works alongside the federal SBD and forms part of your overall tax optimization strategy. Used together, they lower your tax burden while maintaining compliance with Revenu Québec and the CRA.

At T2inc.ca, our corporate tax accountants help hundreds of owners each year assess SBD eligibility and file the CO-17 return online, efficiently and in full compliance.

Need help? Contact us today to discuss your situation. Together, we’ll choose the best approach to optimize your corporate taxes.

FAQ – Quebec Small Business Deduction

Who qualifies for the Quebec Small Business Deduction?

CCPCs with up to $500,000 of active business income that meet Quebec’s paid-hours test (or sector alternative) may access the reduced provincial rate. Groups with high taxable capital should also consider federal interactions.

What counts toward the 5,500 hours in Quebec?

Paid hours actually worked by employees and, in some cases, active shareholders, capped at 40 hours per week per person. Subcontractors and contractors are excluded because they are not considered an employee.

Can associated corporations combine hours for Quebec’s SBD?

Yes, but only for the previous taxation year. The current year’s corporation must meet the 5,500-hour threshold on its own.