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Ontario has reduced its small business corporate income tax rate from 3.2% to 2.2%, effective July 1, 2026.
For an eligible corporation, the change can reduce Ontario corporate tax by up to $5,000 per year on the first $500,000 of qualifying active business income. However, the saving is not automatic. Your corporation’s tax year, income type, ownership structure, and dividend decisions all matter.
Here is what Ontario business owners need to know about the small business tax rate Ontario has introduced, including the proration rules and the dividend tax change coming in 2027.
What changed on July 1, 2026?
Ontario lowered its small business corporate income tax rate from 3.2% to 2.2%.
The lower rate applies to qualifying active business income earned by eligible Canadian-controlled private corporations (CCPCs) with an Ontario permanent establishment. The rate applies to the first $500,000 of active business income, subject to the applicable small business limit and associated-corporation rules.
The federal small business rate remains 9%. As a result, the combined federal and Ontario corporate tax rate on eligible income is now 11.2%, compared with 12.2% before the provincial reduction.
The full 2.2% Ontario rate applies to taxation years that begin on or after July 1, 2026.
Who can use the lower rate?
The reduction is intended for Canadian-controlled private corporations earning income that qualifies for the small business deduction.
You may be eligible if your corporation:
- Is a Canadian-controlled private corporation.
- Has an Ontario permanent establishment.
- Earns active business income.
- Has income within the applicable small business limit.
- Is not affected by associated-corporation or taxable-capital phase-out rules.
The $500,000 limit is generally shared among associated corporations. It may also be reduced when a corporation or associated group has more than $10 million of taxable capital employed in Canada and eliminated at $50 million.
Income such as investment income, certain property income, and income that does not qualify for the small business deduction may not receive the 2.2% rate.
Your corporation’s classification should be confirmed as part of its annual corporate tax filing in Ontario. Applying the lower rate to the wrong income can create an inaccurate return and possible reassessment.
How does proration work for a straddling tax year?
If your corporation’s taxation year includes both dates before and after July 1, 2026, Ontario uses a blended rate.
The rate is prorated based on the number of days in the fiscal year:
- Days before July 1, 2026 are subject to the 3.2% rate.
- Days on or after July 1, 2026 are subject to the 2.2% rate.
- The resulting blended rate applies to eligible small business income for that year.
For example, a corporation with a December 31, 2026 year-end has:
- 181 days before July 1.
- 184 days on or after July 1.
- A blended Ontario small business rate of approximately 2.7%.
That means a calendar-year corporation will not receive the full 2.2% rate for all of its 2026 eligible income. The full rate applies once the taxation year begins on or after July 1, 2026.
What does the 2027 dividend credit change mean?
The corporate tax reduction is being paired with a change to Ontario’s non-eligible dividend tax credit.
Effective January 1, 2027, Ontario will reduce the small business non-eligible dividend tax credit rate from 2.9863% to 1.9863%.
This change is intended to preserve corporate-personal tax integration. In practical terms, it means owner-managers who receive non-eligible dividends may pay more personal tax on those dividends in 2027.
Based on the 2026 Ontario Budget analyses from EY and PwC, the top combined marginal tax rate on non-eligible dividends is expected to increase from 47.74% in 2026 to 48.89% in 2027, assuming no other changes.
This does not mean every owner should automatically pay a dividend before the end of 2026. The right decision depends on your cash needs, personal tax position, retained earnings, shareholder loans, investment plans, and longer-term compensation strategy.
Why clean books matter more than ever
The tax saving depends on accurate information.
If your books are missing transactions, contain unreconciled accounts, or do not clearly separate active business income from other income, your corporation may not capture the available benefit correctly. Timing errors can also affect the proration calculation and the amount of income assigned to each tax year.
Clean, year-round records help you:
- Track income and expenses accurately.
- Confirm whether transactions qualify as active business income.
- Prepare a reliable year-end package.
- Support correct tax calculations and filings.
- Compare corporate tax savings with personal dividend tax consequences.
- Make compensation decisions using current financial information.
Kleero provides full-cycle bookkeeping, including transaction tracking, reconciliations, and timely records for growing Ontario businesses. If your books are behind or contain past errors, our bookkeeping clean-up service can create a reliable starting point.
Clear reporting is also important. With executive and board reporting, you can review profitability, cash flow, and business performance before making tax or dividend decisions.
What should you do next?
Start by confirming how the new rate affects your corporation’s fiscal year and eligible income.
You should also review your 2026 and 2027 dividend plans rather than treating the corporate rate reduction as a simple tax cut. The corporate saving and personal dividend tax change need to be considered together.
Kleero supports Ontario businesses with organized bookkeeping, financial reporting, accounting system setup, and regulatory filings support. We tailor the process to your business and help keep your records accurate, timely, and ready for filing.
Book a free consultation to review your books, reporting process, and next steps.
This article provides general information based on the 2026 Ontario Budget and related professional analyses. It is not personal or corporate tax advice. Speak with a qualified tax professional about your specific circumstances.