Effective July 1, 2026, Ontario’s small business corporate income tax rate will decrease from 3.2% to 2.2%, reducing the combined federal and Ontario tax rate on eligible small business income from 12.2% to 11.2%. The lower rate generally applies to the first $500,000 of active business income earned by a Canadian-controlled private corporation that qualifies for the small business deduction.1
For taxation years that straddle July 1, 2026, the Ontario rate will be prorated, so the blended Ontario small business rate for a corporation with a calendar year end in 2026 will be about 2.7% (or 11.7% combined federal and Ontario).
More Cash Available for Growth
The rate reduction allows more after-tax income to remain in the corporation, providing additional funds for reinvestment, debt repayment, hiring, or expansion. A corporation that fully utilizes the small business deduction could save up to approximately $5,000 annually once the change is fully implemented.
Why the dividend tax credit is also changing
To accompany the corporate tax rate reduction, Ontario will reduce its non-eligible dividend tax credit for individuals from 2.986% to 1.986% effective January 1, 2027. As a result, the highest personal tax rate on non-eligible dividends for Ontario residents will increase from 47.74% to 48.89%. This change is intended to maintain tax integration by aligning the personal tax treatment of non-eligible dividends with the lower corporate tax rate paid on small business income.
Integration is the principle that a business owner should pay approximately the same overall amount of tax whether income is earned directly as an individual or earned through a corporation and later distributed as a dividend. When corporate tax rates decline, integration can be disrupted because more income remains in the corporation after tax.
As a result, business owners may benefit from a greater tax deferral while after-tax profits remain in the corporation, although part of that advantage may be offset when those profits are eventually distributed as non-eligible dividends.
However, if profits eligible for the small business deduction are paid out immediately as dividends, the tax deferral advantage disappears and the shareholder will generally receive a similar amount of after-tax cash as under the previous tax rates.
Similar Changes in Quebec
Quebec has also announced a reduction to its small business tax rate from 3.2% to 2.2%, resulting in substantially the same small business tax rate in both provinces on qualifying income.
Unlike the change in Ontario, the rate reduction is for taxation years ending after April 29, 2026, rather than the blended rate for year-ends that straddle July 1, 2026.
- Eligibility for the small business deduction depends on several factors, including the corporation’s active business income, taxable income, business limit, and associated corporation rules. ↩︎
