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Ontario Small Business Tax Rate 2026 | ClearWealth

By April 14, 2026 No Comments
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.

Last Updated: April 2026

Quick Answer — Ontario Small Business Tax Rate 2026
Ontario’s small business corporate income tax rate will decrease from 3.2% to 2.2%, effective July 1, 2026, as announced in the 2026 Ontario Budget on March 26, 2026.
This rate cut applies to Canadian-controlled private corporations (CCPCs) on the first $500,000 of active business income earned in Ontario, reducing the combined federal and Ontario tax rate from 12.2% (2025) to 11.2% (full year 2027).
Eligible CCPCs may save up to $5,000 per year in provincial corporate tax, and the Ontario government estimates more than 375,000 small businesses across the province will benefit.
Corporations with fiscal years that straddle July 1, 2026, will receive the rate reduction on a prorated basis for the portion of the year falling after July 1.
To maintain tax integration, Ontario’s non-eligible dividend tax credit rate will decrease from 2.9863% to 1.9863% effective January 1, 2027, which will increase the top combined federal/Ontario personal tax rate on non-eligible dividends from 47.74% in 2026 to 48.89% in 2027. For a full overview of ClearWealth’s tax planning services, visit our services page.

Your Corporation Just Got a Tax Cut — Here Is What It Actually Means

A CCPC earning $500,000 in active business income in Ontario may pay up to $5,000 less in provincial corporate tax each year once this cut is fully in effect. That is a real saving — automatic and permanent — from the Ontario Budget tabled on March 26, 2026, by Finance Minister Peter Bethlenfalvy.

The mechanism is straightforward: Ontario proposes to reduce its small business corporate income tax (CIT) rate from 3.2% to 2.2%, effective July 1, 2026. Combined with the unchanged federal small business rate of 9%, the total rate on the first $500,000 of qualifying active income falls from 12.2% to 11.2% once the cut is fully phased in.

There is one important piece of context that shapes everything else in this article, and it is largely absent from most coverage of this budget announcement: the cut to the corporate rate comes with an offsetting adjustment to how dividends are taxed personally, starting in 2027. The saving is real. But understanding what it means for the money you take out of your corporation matters just as much as celebrating the reduction going in.

375,000+ Ontario small businesses expected to benefit
Up to $5,000 Annual provincial tax saving per eligible CCPC
11.2% Combined fed + Ontario rate on first $500K (2027)
Jul 1, 2026 Effective date (subject to enabling legislation)

This article walks through who qualifies, what the numbers look like before and after, and — most importantly — what you should actually do between now and the end of 2026 to make the most of this change.

Who Qualifies for the Ontario Small Business Tax Rate

The reduced Ontario small business tax rate applies exclusively to Canadian-controlled private corporations (CCPCs) — that is, private corporations incorporated in Canada that are ultimately controlled by Canadian residents. To qualify, the income must be active business income (not investment income), must not exceed $500,000, and the corporation’s taxable capital employed in Canada must generally be under $10 million.

A CCPC — Canadian-controlled private corporation — is a private corporation that is resident in Canada and is not controlled by non-residents or public companies. Most small incorporated businesses in Ontario meet this definition.

To access the small business rate, four conditions generally must be met:

  • +
    The business must be a CCPC. Sole proprietors, partnerships, and employees do not file corporate T2 returns and do not access the small business CIT rate. Their business income is taxed at personal rates.
  • +
    The income must be active business income. Revenue from operating your business qualifies. Passive investment income earned inside the corporation — such as interest, rental income from an investment property, or dividends from a portfolio — is taxed at approximately 50.17% and does not benefit from this reduction.
  • +
    Active business income must not exceed $500,000. This is the federal and Ontario small business limit. Income above $500,000 is taxed at the general combined corporate rate of 26.5%, which is unchanged.
  • +
    Taxable capital must generally be under $10 million. The small business limit begins to phase out when a CCPC’s taxable capital employed in Canada exceeds $10 million, and phases out entirely at $50 million. Associated groups of corporations are tested together.
  • –
    Sole proprietors and self-employed individuals do not qualify directly. If you run your business personally rather than through a corporation, this rate cut does not apply to you — though it may affect your decision to should you incorporate.

Note: Ontario does not implement the federal investment income restriction on the provincial small business limit. This means passive investment income above $50,000 per year does not reduce the Ontario small business limit — though it still affects the federal limit. This is a meaningful difference for CCPCs with significant corporate investment portfolios.

ClearWealth Accounting Advisors
Do You Qualify for the Ontario Small Business Tax Rate?
Answer five questions to check eligibility for the proposed 2.2% Ontario corporate rate, effective July 1, 2026.
Question 1 of 5
Is your business incorporated as a private corporation in Canada?
Source: Ontario Budget 2026 Annex — budget.ontario.ca/2026/annex.html · CRA CCPC definition — canada.ca
ClearWealth Accounting Advisors · clearwealth.tax · For informational purposes only

Pick Your Path — How This Tax Cut Applies to Your Situation

Not everyone reading this article is in the same position. Here is how the change applies depending on where you are right now.

Path A
I am already incorporated as a CCPC in Ontario
This rate cut applies to you automatically — no forms to file, no elections to make. The lower rate takes effect July 1, 2026. Your T2 return will reflect the blended or full-year rate depending on your fiscal year-end. The real value comes from planning around it: see the Four-Step Plan section below.
Path B
I am self-employed or a sole proprietor
This cut does not apply to you directly. You pay personal income tax on your business income, not corporate tax. However, the rate reduction may strengthen the financial case for incorporating your business. Read our guide on incorporation vs. sole proprietorship to see how the numbers compare at your income level.
Path C
My CCPC has income over $500,000 or capital near $10M
The small business limit phase-out may reduce or eliminate your access to the lower rate on income above $500,000 or where taxable capital exceeds $10 million. The calculation is specific to your associated group of corporations. A review with your accountant before your fiscal year-end can clarify your effective rate and any planning opportunities.

Ontario Corporate Tax Rates Before and After the Cut — Side by Side

The combined federal and Ontario corporate tax rate on the first $500,000 of active business income earned by a qualifying CCPC falls from 12.2% in 2025 to approximately 11.7% for the 2026 calendar year (blended), and to 11.2% for full years beginning on or after July 1, 2026. Ontario’s general corporate rate of 11.5% — and the 26.5% combined general rate — remain unchanged.

Rate Type 2025 2026 (Blended) 2027 (Full Year)
Ontario small business CIT rate 3.2% ~2.7% 2.2%
Combined fed + Ontario rate on first $500K 12.2% ~11.7% 11.2%
Ontario general corporate CIT rate 11.5% 11.5% 11.5%
Combined general corporate rate 26.5% 26.5% 26.5%
CCPC investment income rate ~50.17% ~50.17% ~50.17%

The 2026 blended rate shown above applies to corporations with a December 31 fiscal year-end. Corporations with a non-calendar fiscal year will have a different blended rate depending on how many months of their fiscal year fall before and after July 1, 2026. Confirm the exact calculation on your T2 return with your accountant.

Source: Ontario Budget 2026 Annex (budget.ontario.ca/2026/annex.html) and CRA corporate income tax rate tables.

ClearWealth Accounting Advisors
Combined Corporate Tax Rates: Small Business vs. General (2025–2027)
Federal + Ontario combined rates. Small business rate applies to first $500,000 of active CCPC income. Blended 2026 rate assumes December 31 fiscal year-end.
2025 Rate
12.2%
Small business
2026 Rate
11.7%
Blended (Dec 31 FY)
2027 Rate
11.2%
Full year (proposed)
General Rate
26.5%
Unchanged all years
Source: Ontario Budget 2026 Annex — budget.ontario.ca/2026/annex.html · PwC Canada 2026 Ontario Budget Tax Insights
ClearWealth Accounting Advisors · clearwealth.tax · For informational purposes only

Your Four-Step Plan to Make the Most of the Rate Reduction

The rate reduction is automatic — but what you do around it determines whether you capture the full value. These four steps apply to most Ontario CCPCs in 2026.

1
Verify
Confirm your corporation qualifies. Check that your active business income stays under $500,000 and your taxable capital is generally under $10 million. If you are close to either threshold — or if your business is part of an associated group of corporations — the phase-out rules may reduce the benefit. A review before your fiscal year-end can catch this early and open options for income splitting or structuring that preserve the lower rate.
2
Review
Review your salary-versus-dividend mix before June 30, 2026. The lower corporate rate means more after-tax money stays inside the corporation. Depending on your cash flow needs and personal tax situation, it may make sense to leave more earnings inside the company rather than declaring dividends — at least for the near term. Passive investment income accumulated inside the corporation may also interact with the passive income and corporate tax planning rules, so this decision is worth modelling carefully.
3
Plan
Plan for the 2027 dividend tax credit change before year-end 2026. The non-eligible dividend tax credit rate drops on January 1, 2027, raising the personal tax rate on dividends paid from small business income. If you were planning to declare a large dividend from retained earnings, model whether doing so in 2026 — while the current higher credit still applies — could result in a lower combined tax bill. This is a time-sensitive planning opportunity that closes December 31, 2026.
4
Update
Update your T2 filing strategy with your accountant. If your fiscal year straddles July 1, 2026, your T2 return for that year will use a blended provincial rate — and that calculation must be applied correctly. Do not assume your filing software will handle it automatically without review. If you want to walk through how this affects your specific fiscal year, book a consultation with ClearWealth before your filing deadline.

The Hidden Catch — What Happens to Dividends in 2027

To maintain tax integration after the corporate rate cut, Ontario’s non-eligible dividend tax credit rate will decrease from 2.9863% to 1.9863%, effective January 1, 2027. This increases the top combined federal and Ontario personal tax rate on non-eligible dividends from 47.74% in 2026 to 48.89% in 2027. For owner-managers who distribute all corporate income as dividends, the net effect across both levels of tax is roughly neutral — but timing matters.

The Canadian tax system is built on a principle called tax integration: income taxed inside a corporation and then paid out as dividends should result in roughly the same total tax as if it had been earned personally to begin with. When the corporate rate drops, the dividend tax credit — which compensates shareholders for the corporate tax already paid — must also adjust. If it did not, business owners would get a permanent windfall simply by routing income through a corporation.

In practice, that adjustment means the non-eligible dividend tax credit rate drops. A non-eligible dividend is simply the type of dividend paid out of income that was taxed at the small business rate — as opposed to the general corporate rate. For most Ontario CCPC owner-managers, this is the primary dividend type they receive.

Here is what changes and what stays the same:

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    The corporation pays less corporate tax on its first $500,000 of active income from July 1, 2026 forward.
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    More after-tax income accumulates inside the corporation faster under the new rate.
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    When that income is eventually paid out as a non-eligible dividend, the personal tax rate on it rises from 2027 onward.
  • –
    The change in the dividend credit rate does not take effect until January 1, 2027 — creating a planning window in 2026.

For a business owner who distributes all corporate income as dividends every year, the combined tax burden over time remains roughly the same as before the cut. The opportunity lies in the transition: the corporate rate drops July 1, 2026, but the personal rate on dividends does not rise until January 1, 2027. That six-month gap — and the entire 2026 calendar year — may offer timing advantages worth modelling with your accountant.

ClearWealth Accounting Advisors
What Changes for Owner-Manager Dividends: 2026 vs. 2027
The corporate rate cut is offset by a reduction in the non-eligible dividend tax credit. Net impact is roughly neutral over the long term — but timing matters in 2026.
Rate / Credit 2026 2027 (Proposed) Change
Ontario Small Business CIT Rate 3.2% 2.2% ▼ 1.0 pp
Ontario Non-Eligible Dividend Tax Credit Rate 2.9863% 1.9863% ▲ 1.0 pp
Top Combined Personal Tax Rate on Non-Eligible Dividends 47.74% 48.89% ▲ 1.15 pp
Planning Insight — 2026 Window
The corporate rate drops July 1, 2026 — but the higher personal dividend rate does not take effect until January 1, 2027. Dividends declared in 2026 still benefit from the higher tax credit rate. For owner-managers with large retained earnings, the 2026 calendar year may offer a timing advantage worth modelling with your accountant.
Sources: PwC Canada — 2026 Ontario Budget Tax Insights · Andersen in Canada — Ontario Budget Tax Updates 2026 · Ontario Budget 2026 Annex
ClearWealth Accounting Advisors · clearwealth.tax · For informational purposes only

Common Mistakes Ontario Business Owners Make With Corporate Tax Rate Changes

Rate changes tend to generate confusion, and this one is no exception. These are the six mistakes we most commonly see when an Ontario small business tax rate shifts.

X
Assuming investment income qualifies. The reduced rate applies only to active business income — passive investment income inside the corporation is taxed at approximately 50.17%, which has not changed and is not affected by this cut.
X
Not prorating for a mid-year fiscal change. Corporations whose fiscal year straddles July 1, 2026, automatically receive a blended rate — but the calculation must be verified on the T2 return. It is not always applied correctly by default software settings.
X
Ignoring retained earnings accumulation. Leaving money inside the corporation can be tax-efficient in the short term, but excess corporate investment income can trigger the passive income rules that reduce your federal small business limit. Read our retained earnings guide for business owners to understand how to monitor this threshold.
X
Paying large dividends in 2027 without modelling the new personal rate. The dividend tax credit drops January 1, 2027 — owner-managers who plan to extract significant retained earnings should consider whether doing so in 2026, while the higher credit still applies, may result in lower overall tax.
X
Confusing the Ontario rate cut with the federal rate. The 9% federal small business rate is unchanged. Only Ontario’s provincial portion drops from 3.2% to 2.2%. The combined rate falls from 12.2% to 11.2% — not to 2.2%.
X
Assuming the phase-out threshold does not apply. If your associated group of CCPCs has taxable capital employed in Canada between $10 million and $50 million, the small business limit begins to phase out and the full rate reduction may not apply in full.

Frequently Asked Questions — Ontario Small Business Tax Rate 2026

What is the new Ontario small business tax rate in 2026?

Ontario proposes to reduce the provincial small business corporate income tax rate from 3.2% to 2.2%, effective July 1, 2026. This applies to Canadian-controlled private corporations (CCPCs) on the first $500,000 of active business income. The combined federal and Ontario rate on that income falls from 12.2% in 2025 to 11.2% on a full-year basis in 2027. This measure was announced in the March 26, 2026 Ontario Budget and is subject to the passage of enabling legislation.

When exactly does the Ontario small business tax rate drop take effect?

The rate reduction takes effect July 1, 2026, as announced in the Ontario Budget tabled on March 26, 2026. Corporations with a December 31 fiscal year-end will pay a blended provincial rate of approximately 2.7% for the 2026 calendar year. The full 2.2% provincial rate applies for any fiscal year that begins on or after July 1, 2026, or for the portion of a straddling year that falls after that date.

How much will my Ontario CCPC save with the 2026 tax rate cut?

Eligible CCPCs may save up to $5,000 per year in Ontario provincial corporate tax, according to the Ontario Budget 2026. That maximum applies to a corporation earning the full $500,000 of active business income at the reduced rate for a complete year. The actual saving depends on the amount of active business income your corporation earns, your fiscal year-end, and whether any phase-out rules apply to your situation.

Does the Ontario small business tax rate cut affect how much I pay myself as dividends?

Yes — indirectly. To maintain tax integration, Ontario proposes to reduce the non-eligible dividend tax credit rate from 2.9863% to 1.9863%, effective January 1, 2027. This increases the top combined federal/Ontario personal tax rate on non-eligible dividends from 47.74% in 2026 to 48.89% in 2027. For income that is fully distributed, the combined tax burden across corporate and personal levels remains roughly neutral — but the timing of dividends in 2026 versus 2027 can make a difference for some owner-managers.

My fiscal year ends in September — how does the July 1 rate change apply to me?

If your corporation’s fiscal year straddles July 1, 2026, the rate reduction is applied on a prorated basis for the portion of the year falling after that date. For a fiscal year running October 1, 2025 to September 30, 2026, approximately three months fall after July 1, so the lower 2.2% rate generally applies to roughly one-quarter of the year’s active income. Your accountant should confirm the exact blended rate calculation on your T2 return for that year.

I am self-employed and not incorporated. Does this tax cut affect me?

Not directly. Self-employed individuals and sole proprietors pay personal income tax on business income — they do not file a corporate T2 return and do not access the small business corporate tax rate. However, this rate reduction may strengthen the financial case for incorporating your business, depending on your income level and how you plan to use the profits. A qualified accountant can model whether incorporation makes sense in your specific situation.

What happens to the Ontario small business rate if my corporation earns more than $500,000?

Income above the $500,000 small business limit is generally taxed at Ontario’s general corporate income tax rate of 11.5%, plus the federal rate of 15%, for a combined rate of 26.5%. That general rate is unchanged by the 2026 budget. The small business limit also begins to phase out when a CCPC’s taxable capital employed in Canada exceeds $10 million, and is eliminated entirely at $50 million, with associated corporations tested as a group.

What other Ontario budget changes should incorporated business owners know about for 2026?

The 2026 Ontario Budget also proposes immediate 100% write-offs (accelerated CCA) for manufacturing and processing equipment, clean technology assets, and certain productivity-enhancing assets — effective for qualifying expenditures already incurred on or after specified dates. The Regional Opportunities Investment Tax Credit (ROITC) is proposed to expire effective January 1, 2027, meaning eligible expenditures must be incurred on or before December 31, 2026 to qualify. The non-eligible dividend tax credit rate reduction also takes effect January 1, 2027. Consult the Ontario Budget 2026 Annex at budget.ontario.ca/2026/annex.html for the full list of measures.

ClearWealth Accounting Advisors
Key Dates for Ontario CCPCs — 2026 Budget Implementation Timeline
Five milestone dates that every Ontario incorporated business owner should have on their planning calendar.
March 26, 2026
Ontario Budget 2026 Tabled
Finance Minister Bethlenfalvy announced the proposed 1 percentage point reduction to the Ontario small business corporate income tax rate, alongside accelerated CCA measures and the ROITC expiry.
July 1, 2026
Small Business CIT Rate Drops to 2.2%
Ontario’s provincial small business corporate income tax rate is proposed to decrease from 3.2% to 2.2%. Combined with the 9% federal rate, the total rate on the first $500,000 of active CCPC income becomes 11.2% for full years. Corporations with fiscal years straddling this date receive a prorated blended rate on their T2.
December 31, 2026
Last Day to Use Current Non-Eligible Dividend Credit Rate
Non-eligible dividends declared and paid in 2026 still benefit from the higher dividend tax credit rate of 2.9863%. This is the final day to take advantage of the 2026 rate before the credit drops on January 1, 2027. Owner-managers planning large dividend distributions should model this deadline carefully.
January 1, 2027
Non-Eligible Dividend Tax Credit Reduces to 1.9863%
To maintain tax integration with the lower corporate rate, Ontario’s non-eligible dividend tax credit rate drops from 2.9863% to 1.9863%. This increases the top combined personal tax rate on non-eligible dividends from 47.74% to 48.89%. Applies to dividends paid from 2027 onward.
January 1, 2027
Regional Opportunities Investment Tax Credit (ROITC) Expires
The ROITC — a 10% refundable credit for eligible capital investments in designated Ontario regions — will expire for new expenditures. Qualifying expenditures incurred on or before December 31, 2026 remain eligible under existing rules. Businesses with pending eligible projects should consider timing before year-end 2026.
Source: Ontario Budget 2026 Annex — budget.ontario.ca/2026/annex.html · All dates subject to passage of enabling legislation
ClearWealth Accounting Advisors · clearwealth.tax · For informational purposes only

Ready to Turn This Tax Cut Into a Real Advantage for Your Business?

The rate reduction is automatic — you do not need to file anything to receive it. But the planning decisions around dividends, retained earnings, and fiscal-year timing are where the real money is won or lost. Knowing that a saving exists and structuring your corporation to capture the full benefit are two different things.

At ClearWealth, we work with incorporated professionals and small business owners across Ontario to run these numbers in the context of your specific situation — your income, your fiscal year, your compensation mix, and your plans for 2027 and beyond. If you want a clear picture of what this rate change means for your corporation, book a consultation with our team.

Book a Consultation

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.

Sources & References

  1. Ontario Ministry of Finance. 2026 Ontario Budget Annex — Details of Tax Measures. March 26, 2026. budget.ontario.ca/2026/annex.html
  2. PwC Canada. Tax Insights: 2026 Ontario Budget — Tax Highlights. March 2026. pwc.com/ca/en/services/tax/budgets/2026/ontario.html
  3. Andersen in Canada. Ontario Provincial Budget Tax Updates 2026. March 2026. ca.andersen.com
  4. Welch LLP. Insight into the Ontario Budget — March 26, 2026. welchllp.com
  5. Impact CPAs. 2026 Ontario Budget Summary. impactcpas.ca
  6. Canada Revenue Agency. Corporation Tax Rates. canada.ca — CRA Corporation Tax Rates
  7. Ontario Chamber of Commerce. Budget 2026 Delivers on Ontario Chamber’s Call for Small Business Tax Relief. March 26, 2026. occ.ca
  8. CP24 / The Canadian Press. Ontario 2026 Budget Highlights: Small Business Tax Cut, AI Funding. March 26, 2026. cp24.com