What changed
The 2026 Ontario budget cut the provincial small business rate, the rate a Canadian-controlled private corporation pays on its first $500,000 of active business income, from 3.2% to 2.2%, effective July 1, 2026. The federal rate on that income stays at 9%, so the combined rate goes from 12.2% to 11.2%.
On $500,000 of qualifying income, one percentage point is worth up to $5,000 a year in corporate tax.
Why your 2026 rate is probably 11.7%, not 11.2%
Because the cut took effect in the middle of the year, a tax year that straddles July 1, 2026 is prorated by days. For a corporation with a December 31 year-end, about half the year is taxed at the old Ontario rate and half at the new one, which works out to roughly 2.7% Ontario and 11.7% combined for 2026. The full 11.2% applies to tax years that start after June 30, 2026, so a calendar-year corporation gets it from January 1, 2027.
| Tax year | Ontario | Combined |
|---|---|---|
| 2025 | 3.2% | 12.2% |
| 2026 (calendar year-end, blended) | about 2.7% | about 11.7% |
| 2027 | 2.2% | 11.2% |
The catch: dividends cost a little more personally from 2027
Ontario also lowered the dividend tax credit on non-eligible dividends, the kind most small corporations pay their owners, starting January 1, 2027. At the top bracket, the combined personal rate on non-eligible dividends rises from 47.74% to 48.89%. The corporation pays less tax and the shareholder pays a bit more when the money comes out, which keeps the system roughly balanced.
What to do before your year-end
- Ask whether income or expenses can be timed so more profit falls into the lower-rate period, where that is genuinely possible
- If you plan to pay yourself non-eligible dividends, consider whether paying some in 2026 rather than 2027 makes sense for your personal bracket
- Revisit your salary-versus-dividend mix for 2027, since the dividend change shifts the numbers slightly toward salary in some cases
- Check your passive investment income: the $500,000 limit still shrinks when the group earned more than $50,000 of it last year
- Make sure your accounting software and tax estimates use the blended rate for 2026 instalments
The right answer depends on your income, your family and your plans for the money, so this is worth a short conversation before your year-end rather than after it. See our corporate tax and planning services.
Common questions
Does the 2.2% rate apply to all corporations?
No. It applies to active business income of a Canadian-controlled private corporation that qualifies for the small business deduction, up to the $500,000 business limit shared with any associated corporations. Investment income and income above the limit are taxed at higher rates.
My year-end is June 30. Which rate do I use?
A June 30, 2026 year-end ends before the cut, so it uses the old 3.2% Ontario rate. Your year starting July 1, 2026 gets the full 2.2% rate.
Do I need to change my instalments?
Instalments are based on estimated or prior-year tax, so a lower rate may let you reduce them. We can recalculate them with you.
This article is general information based on the rules as of its date, not advice for your situation. Talk to us before acting on it.
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