Ontario's small business corporate income tax rate dropped from 3.2% to 2.2% on July 1, 2026 — the lowest it's been in at least eight years. The province pegs the total relief at $1.1 billion over three years, reaching more than 375,000 incorporated small businesses (Ontario Budget 2026, Annex, budget.ontario.ca).
But the cut arrives bundled with a less-publicized change: a dividend tax credit reduction landing January 1, 2027, that can claw back some of the benefit for owners who pay themselves through dividends. Here's what actually changed, what it's worth in real dollars, and the one date every incorporated Ontario business owner should have on their calendar.
Key Takeaways
- Ontario's small business tax rate fell from 3.2% to 2.2% on July 1, 2026, prorated for fiscal years straddling the date (Ontario Budget 2026).
- Combined with the federal 9% rate, the total small business tax rate drops to 11.2%, down from 12.2%.
- Ontario projects $1.1B in relief over three years, benefiting 375,000+ businesses — but the $500,000 income threshold is unchanged.
- A non-eligible dividend tax credit cut on January 1, 2027 partly offsets the win for owners who pay themselves dividends.
- On $500,000 of active business income, the provincial cut alone is worth up to $5,000 a year.
What Exactly Changed in Ontario's Small Business Tax Rate?
In 2026, Ontario cut the small business corporate income tax (CIT) rate from 3.2% to 2.2%, effective July 1 (Ontario Budget 2026, Annex, budget.ontario.ca). The cut applies to the first $500,000 of active business income earned by Canadian-controlled private corporations (CCPCs) — that threshold is unchanged, despite some secondary sources suggesting it was raised to $600,000. For a corporation whose fiscal year straddles July 1, 2026, Ontario prorates the rate: part of the year taxed at 3.2%, the rest at 2.2%.
For entrepreneurs still deciding whether incorporating makes sense at all, our sole proprietor vs. corporation comparison breaks down exactly when this combined 11.2% rate tips the math in favour of incorporating.
How Much Will Your Corporation Actually Save?
On $500,000 of active business income — the maximum eligible for the small business rate — the 1-percentage-point provincial cut is worth up to $5,000 a year in Ontario tax alone. Combined with the unchanged 9% federal small business rate, the total tax rate on that income falls from 12.2% to 11.2%.
Take a Mississauga-based consulting corporation earning $350,000 in active business income in its 2026-27 fiscal year. At the old 3.2% rate, Ontario tax on that income was $11,200. At 2.2%, it drops to $7,700 — a $3,500 saving that flows straight to retained earnings or reinvestment, with no change to how the business actually operates.
That saving scales with income up to the $500,000 cap. Active business income above that threshold is taxed at Ontario's general corporate rate, not the small business rate — so the benefit is largest, proportionally, for businesses earning close to the cap without exceeding it.
The Catch: A Dividend Tax Credit Cut Is Coming January 2027
Starting January 1, 2027, Ontario's non-eligible dividend tax credit drops from 2.9863% to 1.9863% (Ontario Budget 2026, Annex). For owners who pay themselves through dividends rather than salary, this raises the top personal tax rate on non-eligible dividends from 47.74% to 48.89%, pushing the combined corporate-and-personal tax on investment income to roughly 58.86%, up from 57.93%.
Most coverage of this budget led with the headline rate cut and buried the dividend credit change in the fine print. But for an owner-manager who draws dividends instead of salary, the two changes pull in opposite directions — and depending on how you're structured, the January 2027 change can eat into a real share of what the July 2026 cut just gave back.
Why CFIB Fought for This — and What Tariffs Have to Do With It
CFIB says its 40,000 Ontario members pushed for this cut through more than 50 meetings at Queen's Park and an 11,000-signature petition (CFIB, March 26, 2026). The timing isn't a coincidence: a CFIB survey found 72% of Ontario small businesses report being affected by U.S. tariffs, split between 28% directly hit and 44% feeling indirect effects.
"Our members were hoping this budget would feature a new line item they could call their own, and the Ontario government delivered," CFIB said in its response to the 2026 budget.
For the cost side of the ledger this year, our post on Ontario's minimum wage increase to $17.95/hour covers the payroll pressure this tax relief is partly offsetting.
Should You Incorporate Now, or Wait?
If you're already incorporated, no action is needed — the lower rate applies automatically to income earned after July 1, 2026. If you're still operating as a sole proprietor and weighing incorporation, this cut makes the math more favourable, but the right call still depends on your income level, liability exposure, and how you plan to pay yourself.
Confirm How Proration Applies to Your Fiscal Year
If your corporate fiscal year straddles July 1, 2026, part of your income is taxed at 3.2% and part at 2.2% — confirm the split with your accountant rather than assuming a full-year 2.2% rate applies.
Model Both Changes Together, Not Just the Cut
Run your numbers at the new 11.2% combined rate and, if you draw dividends, against the January 2027 dividend credit change — the two moves can partially cancel each other out.
Revisit the Incorporation Math If You Haven't Yet
If you're still a sole proprietor, the gap between personal marginal rates and the new 11.2% combined small business rate just widened. Our step-by-step guide to registering a business in Ontario covers what incorporating actually involves.
Talk to Your Accountant Before Changing How You Pay Yourself
Shifting between salary and dividends has ripple effects on CPP contributions, RRSP room, and personal tax brackets — don't restructure compensation based on the rate cut alone.
Frequently Asked Questions: Ontario's 2026 Small Business Tax Cut
What is Ontario's small business tax rate in 2026?
Ontario's small business corporate income tax rate is 2.2%, down from 3.2%, effective July 1, 2026. The rate is prorated for corporate fiscal years that straddle that date (Ontario Budget 2026, Annex).
What is the combined federal and provincial small business tax rate now?
The combined rate is 11.2% — the federal small business rate of 9% plus Ontario's new 2.2% rate — down from 12.2% before July 1, 2026.
Does the rate cut apply to all of my corporation's income?
No. It applies only to the first $500,000 of active business income eligible for the small business deduction — that threshold is unchanged in the 2026 budget. Income above $500,000 is taxed at Ontario's general corporate rate, not the small business rate.
What is the dividend tax credit change, and when does it take effect?
Ontario's non-eligible dividend tax credit drops from 2.9863% to 1.9863% on January 1, 2027 (Ontario Budget 2026, Annex). This raises the top personal tax rate on non-eligible dividends from 47.74% to 48.89%, partly offsetting the small business rate cut for owners who pay themselves through dividends.
Do I need to do anything to get the lower tax rate?
No. The 2.2% rate applies automatically to active business income earned on or after July 1, 2026, prorated for fiscal years that straddle the date. No election or application is required.
Ontario's small business tax cut is real money back for more than 375,000 incorporated businesses — but it's not the whole story. The rate drop takes effect automatically; the dividend credit change in January 2027 requires a conversation with your accountant if dividends are part of how you pay yourself.
