This article is for informational purposes only and does not constitute tax or financial advice. Consult a qualified accounting professional before making any tax or financial decisions.
Quick answer
Ontario’s small business income limit is currently $500,000 of active business income. A Private Member’s Bill (Bill 12, Cutting Taxes on Small Businesses Act, 2025) proposes raising the limit to $600,000 effective January 1, 2026 and increasing the small business deduction rate. The Ontario government’s 2026 Budget did not adopt the $600,000 figure. The Budget instead proposes cutting the Ontario small business corporate income tax rate from 3.2% to 2.2% effective July 1, 2026, while keeping the $500,000 limit. The federal small business limit remains at $500,000.
Why this is the most-misunderstood Ontario tax change of 2026
If you own an Ontario corporation, you have probably seen the headlines: “Ontario’s small business limit going up to $600,000.” You may have also seen headlines about the Ontario small business tax rate dropping to 2.2%. Both stories are real, and confusing them can lead to costly planning mistakes.
Two different changes are moving through the system at once. One is a Private Member’s Bill that proposes a higher income limit. The other is a measure in the 2026 Ontario Budget that proposes a lower tax rate but leaves the limit alone. They have different sponsors, different effective dates, and different odds of becoming law as written.
For most Ontario owner-managers, the practical question is not “which version do I prefer” but “what should I plan around given that neither is fully settled.” That is what the rest of this guide is for. Our broader overview of important Canadian tax changes for 2026 sets the wider context.
Quick start: pick your path
Use the path that matches your situation. Each lists actions worth taking now.
The proposed $600,000 limit and the proposed 2.2% rate apply only to corporations and do not affect personal tax filers. If your business is growing past roughly $100,000 of net income, our guide on self-employed or incorporated in Canada 2026 walks through the trade-offs.
Today, all of your active business income generally qualifies for the small business rate. If the proposed Ontario rate cut to 2.2% takes effect July 1, 2026, fiscal-year proration determines the blended rate — speak to your accountant before timing large bonuses.
You are the most exposed to phase-out rules that quietly shrink the small business deduction below the headline figure. If Bill 12 passes, the extra $100,000 of headroom could be valuable; if it does not, the rate cut still helps. Review your associated-corporation allocation under Schedule 23 to confirm no related entity is unintentionally consuming part of the limit.
Where the $600,000 figure actually comes from
The $600,000 figure comes from Bill 12, Cutting Taxes on Small Businesses Act, 2025, a Private Member’s Bill in the Ontario Legislature. It proposes raising the Ontario small business income limit from $500,000 to $600,000 and increasing the small business deduction rate from 8.3% to 9.9%, effective January 1, 2026. As of this update, Bill 12 had not received Royal Assent, which means it is not law.
A Private Member’s Bill is legislation introduced by an individual member rather than by the government. These bills can pass, but most do not, and even when they advance they often change substantially before becoming law. Treating Bill 12 as already in effect is a common mistake right now.
The federal small business limit is a separate rule under the federal Income Tax Act, and Bill 12 does not change it. The federal limit remains $500,000. For a refresher on how federal and provincial rates layer together, see our overview of Canada’s corporate tax rates.
Bill 12 versus the 2026 Ontario Budget: side-by-side
The two measures are easy to confuse because they target the same area of tax law. They are not the same thing, and only one of them comes from the government. Our 2026 Canadian tax guide for businesses walks through the wider picture; the table below isolates the two Ontario-specific items.
| Feature | Bill 12 (Private Member) | 2026 Ontario Budget |
|---|---|---|
| Sponsor | Private Member’s Bill | Government of Ontario |
| Status (April 2026) | Not yet law — no Royal Assent | Tabled March 26, 2026 — proposed |
| Income limit | $500,000 → $600,000 | Unchanged at $500,000 |
| SBD rate | 8.3% → 9.9% | Effective Ontario rate cut: 3.2% → 2.2% |
| Effective date (if enacted) | January 1, 2026 | July 1, 2026 |
| Federal limit affected | No | No |
Reading across the table, the simplest way to keep the two measures straight is this: Bill 12 changes how much income qualifies for the small business rate, while the 2026 Budget changes what rate applies. They could both happen, neither could happen, or only one could happen.
What the rate change is actually worth: worked examples
To make the numbers concrete, consider two illustrative Ontario CCPCs. Both assume full eligibility for the small business deduction, only Ontario-source active business income, and no phase-outs. Real cases differ; figures are for illustration only.
Example A is an Ontario CCPC with $400,000 of active business income. Today, the Ontario portion at 3.2% produces roughly $12,800. If the Budget rate cut to 2.2% takes effect for the full year, that falls to roughly $8,800. Bill 12 would not change this example, because the income is already below the current $500,000 limit.
Example B is an Ontario CCPC with $600,000 of active business income. Today, the first $500,000 is taxed at 3.2% (roughly $16,000) and the next $100,000 at 11.5% (roughly $11,500). If only the Budget passes, the rate on the first $500,000 falls to 2.2% (roughly $11,000); the next $100,000 is still taxed at 11.5%. If Bill 12 also passes, the full $600,000 generally falls under the small business rate, where the dollar gap becomes meaningful. Our guide on reducing your tax bill with smart accounting covers tactical options.
The phase-out rules that quietly shrink your limit
Even before Bill 12, the headline limit of $500,000 is rarely the limit your corporation actually receives. Two phase-out rules can shrink it, sometimes to zero, before any rate change makes a difference.
The first is the taxable capital phase-out. The Canada Revenue Agency reduces the small business limit on a straight-line basis once a CCPC group’s taxable capital in the previous year exceeds $10 million, and eliminates it at $50 million. Ontario applies the same threshold. Taxable capital includes shareholder equity, retained earnings, and certain loans, so growing the balance sheet of the corporation or an associated corporation triggers the grind.
The second is the federal passive investment income grind. If your CCPC group earns more than $50,000 of adjusted aggregate investment income (AAII) in the prior year, the federal small business limit is reduced by $5 for every $1 above that threshold and disappears at $150,000 of AAII. According to the Canada Revenue Agency, Ontario does not apply this passive-income restriction, so the Ontario limit can survive even when the federal limit has been ground down to zero. Our deeper explainer on the passive income trap for Canadian SMEs covers the planning options.
Step-by-step: how to plan for 2026 if you run an Ontario CCPC
Use the steps below as a working order for the year. For broader fiscal-year framing, see our fiscal year 2026 planning guide.
- 1Confirm CCPC status and provincial allocationCheck that your corporation still meets the CCPC definition under the federal Income Tax Act and that Ontario is your primary permanent establishment.
- 2Project active business income for the fiscal yearEstimate where you will land relative to the current $500,000 limit; this drives every decision below.
- 3Check associated-corporation allocation under Schedule 23The limit is shared across related companies, and misallocation penalties are easy to avoid and painful to fix later.
- 4Model bonus versus dividend mix at the proposed 2.2% rateThe rate change shifts integration math between corporate and personal tax, so run the comparison rather than relying on last year’s mix.
- 5Decide whether to defer or accelerate income around July 1, 2026Years straddling the proposed rate-change date are generally prorated, so timing of income recognition can change the blended rate.
Common mistakes Ontario owner-managers make right now
- →Assuming the $600,000 limit is already in effect. Until Bill 12 receives Royal Assent it is a proposal; planning as if the limit has changed is a real audit risk.
- →Confusing the rate cut with the limit change. The 2026 Budget proposes a rate cut to 2.2%; Bill 12 proposes a higher limit. They are different measures.
- →Treating the federal and Ontario limits as if they move together. The federal limit is set under the federal Income Tax Act and is unchanged.
- →Ignoring the taxable capital phase-out. Many growing CCPCs lose part of the limit because of balance-sheet size before they reach the income ceiling.
- →Forgetting to allocate the limit across associated corporations. The limit is shared across the group, and missing Schedule 23 allocations is a common CRA reassessment.
- →Treating a personal service business or specified investment business as if it qualifies. Both categories are excluded from the small business deduction.
Frequently asked questions
Is the Ontario small business income limit really going up to $600,000?
The $600,000 figure comes from Bill 12, a Private Member’s Bill. As of this update it had not received Royal Assent, so the current Ontario small business income limit remains $500,000.
When does the new Ontario small business tax rate of 2.2% start?
The 2026 Ontario Budget proposes cutting the rate from 3.2% to 2.2% effective July 1, 2026. The change is proposed, not yet enacted, and would be prorated for fiscal years straddling that date.
Did the federal $500,000 small business limit also change?
No. The federal limit under the federal Income Tax Act remains $500,000. Bill 12 only proposes changes to Ontario’s provincial limit.
What happens if my fiscal year crosses January 1, 2026 or July 1, 2026?
Both proposed changes use proration if your fiscal year straddles the effective date. The applicable rate or limit is generally calculated by days before and after the change, producing a blended result.
Do I qualify for the Ontario small business deduction if I am a professional corporation?
Most Canadian-controlled professional corporations qualify, but personal service businesses and specified investment businesses are excluded by the Income Tax Act.
Why does my accountant say my limit is less than $500,000?
Two phase-outs can quietly reduce the limit. Taxable capital between $10 million and $50 million reduces it on a straight-line basis. Federally, passive investment income above $50,000 also grinds it down, though Ontario does not apply that restriction.
Can I split my company into two corporations to claim the limit twice?
Generally, no. Associated corporation rules require the limit to be shared. For when a holding structure can legitimately help, see our guide on holding companies and Canadian tax savings.
If Bill 12 does not pass, what changes for me in 2026?
If Bill 12 stalls, the Ontario small business income limit stays at $500,000. The 2026 Budget’s rate cut to 2.2% is a separate measure and would still proceed on its own track if enacted.
Plan your 2026 Ontario corporate tax with confidence.
ClearWealth Accounting Advisors helps Ontario owner-managers reconcile federal and provincial rules, allocate the limit across associated corporations, and time income decisions around moving effective dates.
Book a 30-minute ConsultationThis article is for informational purposes only and does not constitute tax or financial advice. Tax measures referenced (including Bill 12, Cutting Taxes on Small Businesses Act, 2025 and the 2026 Ontario Budget) are subject to legislative change. Consult a qualified accounting professional before making any tax or financial decisions.
Sources & References
- →Legislative Assembly of Ontario, Bill 12, Cutting Taxes on Small Businesses Act, 2025: ola.org/en/legislative-business/bills/parliament-44/session-1/bill-12
- →Government of Ontario, 2026 Ontario Budget — Annex (Tax Measures): budget.ontario.ca/2026/annex.html
- →Canada Revenue Agency, Ontario small business deduction: canada.ca
- →Canada Revenue Agency, Corporation tax rates: canada.ca
- →Department of Finance Canada, federal Income Tax Act: laws-lois.justice.gc.ca/eng/acts/i-3.3
