Ontario has reduced its small business corporate income tax rate from 3.2% to 2.2%. The lower rate took effect on July 1, 2026, and it applies to the first $500,000 of active business income earned by a Canadian-controlled private corporation (CCPC).
This is settled law, not a proposal. The reduction was delivered through Bill 97, the Plan to Protect Ontario Act (Budget Measures), 2026, which has received Royal Assent and is recorded as Statutes of Ontario 2026, chapter 2.
For an incorporated Ontario business that earns the full $500,000 at the small business rate, the cut is worth up to $5,000 a year in provincial corporate tax. That figure applies to a taxation year taxed entirely at the new rate. A taxation year that straddles the July 1 change date uses a prorated rate, so a corporation with a December year-end applies a blended rate on its 2026 return rather than the headline 2.2%.
What Is the Ontario Small Business Tax Rate in 2026?
The Ontario small business corporate income tax rate is 2.2% for days in a taxation year after June 30, 2026. Before that date it was 3.2%.
That rate is the provincial portion of corporate tax only. It is not what your corporation pays in total. Ontario corporations also pay federal corporate income tax, and the federal small business rate of 9% sits on top of the provincial rate. The combined federal and Ontario small business rate is now 11.2%, down from 12.2%.
Three conditions have to be met before the 2.2% rate applies to a dollar of income:
- The corporation must be a Canadian-controlled private corporation throughout the taxation year.
- The income must be active business income earned through a permanent establishment in Ontario, not investment or property income.
- The income must fall within the business limit, which remains $500,000 in Ontario.
Income not eligible for the Ontario small business deduction is generally subject to Ontario's 11.5% general corporate income tax rate, before any applicable credits or special rules.
One point worth clearing up early, because it circulates widely and is wrong: Ontario's business limit has not increased to $600,000. A separate bill, Bill 12, proposed raising the limit and lowering the rate further, but it never passed second reading and has no legal effect. Both the Ontario Ministry of Finance and the Canada Revenue Agency continue to list Ontario's business limit as $500,000. Saskatchewan and Prince Edward Island use a $600,000 limit, and Nova Scotia uses $700,000, which is likely the source of the confusion.
Ontario Small Business Tax Rate: 3.2% vs 2.2%
Previous Ontario Small Business Tax Rate
Ontario's small business rate had been 3.2% since January 1, 2020. Mechanically, the province never legislated "3.2%" as a standalone number. It set a small business deduction rate of 8.3% and subtracted it from the general corporate rate of 11.5%, which produced the 3.2% effective rate.
New 2.2% Ontario Corporate Tax Rate
The same mechanism produced the new rate. Bill 97 increased Ontario's small business deduction rate to 9.3% for days in a taxation year after June 30, 2026. Subtract 9.3% from the unchanged general rate of 11.5% and you get 2.2%.
The wording matters. Because the legislation changes the deduction rate by day, the blended rate for a straddle year is determined by the number of days in the taxation year falling on each side of June 30, 2026. Revenue recognition and the timing of invoices are governed by separate income tax and accounting rules, and should be considered on their own merits rather than as a way of influencing this calculation.
Ontario's general corporate income tax rate is unchanged at 11.5%.
How Much Does the 1% Rate Cut Save?
A one percentage point cut saves $1,000 of provincial tax for every $100,000 of qualifying income, to a maximum of $5,000 at the full business limit.
These figures are provincial tax only, and they assume a full taxation year taxed entirely at the stated rate. A corporation whose taxation year includes July 1, 2026 will land somewhere between the two columns for that year.
Who Qualifies for Ontario's 2.2% Small Business Tax Rate?
Canadian-Controlled Private Corporations (CCPCs)
The rate is available only to a corporation that was a CCPC throughout the taxation year. In broad terms, that means a private corporation resident in Canada that is not controlled, directly or indirectly, by non-residents, by public corporations, or by a combination of the two.
A change in CCPC status does more than affect the rate. Where a corporation becomes or ceases to be a CCPC for a reason other than an acquisition of control, subsection 249(3.1) of the Income Tax Act deems its taxation year to end immediately before the change, with a new taxation year beginning at that point. Because the small business deduction requires the corporation to have been a CCPC throughout the taxation year, eligibility is then determined separately for each of the resulting taxation years, and the business limit is prorated for a taxation year shorter than 51 weeks. Different rules apply where there has been an acquisition of control.
If you are weighing incorporating your business or bringing on new investors, the share structure and the timing of any change deserve attention before the paperwork is signed rather than after.
Active Business Income
Only active business income qualifies. Income from an active business carried on in Canada is broadly the income from the corporation's actual trade or operations. Income from property, such as interest, rents, royalties and portfolio dividends, generally does not qualify, and neither does income from a specified investment business or a personal services business.
The personal services business rules are particularly relevant to contractors who incorporate but perform services in circumstances resembling employment with a single client. That income is denied the small business deduction and is subject to additional restrictions on deductible expenses.
The $500,000 Small Business Limit
The business limit is $500,000, but it is not a fixed entitlement. Several rules can reduce it, and the reductions apply before the 2.2% rate does.
Associated corporations share one limit. If you control more than one corporation, the group must allocate a single $500,000 limit among its members. Running three companies does not produce $1.5 million of small-business-rate room.
Large corporations lose the limit. Ontario parallels the federal taxable capital rule. Where a CCPC and its associated group had taxable capital employed in Canada of more than $10 million in the prior year, the business limit is reduced on a straight-line basis, and it reaches nil at $50 million. A corporation with $30 million of taxable capital, for instance, sees its limit cut by $250,000, leaving $250,000 at the small business rate.
Passive investment income reduces the federal limit, but not the Ontario limit. The two governments diverge here. Federally, the business limit is reduced by $5 for every $1 of adjusted aggregate investment income above $50,000, and it is eliminated once that income reaches $150,000. Ontario did not adopt this rule. The CRA states the position directly: the Ontario small business limit is not subject to the federal passive income business limit reduction, so eligible Ontario small businesses can claim the Ontario small business deduction regardless of how much passive income they earned.
The practical result is that an Ontario corporation can have its federal and provincial business limits sitting at different amounts in the same year. A corporation with $500,000 of active business income and $100,000 of adjusted aggregate investment income loses $250,000 of its federal limit but keeps the full $500,000 provincially. It pays 9% federally on $250,000 and 15% on the rest, while still paying just 2.2% to Ontario on the whole $500,000. That corporation pays roughly $15,000 more tax than one with no passive income, but the damage is entirely federal.
Where the federal and provincial limits diverge like this, the arithmetic stops being something you can do in your head. It is worth having a small business accountant confirm the allocation before the return is filed.
What Is the Combined Federal and Ontario Small Business Tax Rate in 2026?
The combined federal and Ontario small business corporate income tax rate is 11.2% on income taxed entirely after June 30, 2026.
The two layers work independently:
The federal rate is unchanged. The federal basic Part I rate of 38% is reduced to 28% by the federal abatement, then to 15% by the general tax reduction, and CCPCs claiming the small business deduction pay 9%.
The two figures are not interchangeable. The first is what Ontario charges. The second is what the corporation pays across both governments.
The 11.2% figure also assumes a clean taxation year. A corporation whose year spans July 1, 2026 pays 9% federally plus a blended Ontario rate, so its true combined rate for that year sits between 11.2% and 12.2%. The next section explains how that blend is calculated.
How Does the July 1, 2026 Effective Date Affect Your Corporation?
Ontario prorates the rate reduction for any taxation year that straddles July 1, 2026, and the method is set out in the legislation rather than left to interpretation. Subsection 31(4) of the Taxation Act, 2007, as amended, builds the corporation's small business deduction rate for the year by adding together 8.3% multiplied by the ratio of days in the taxation year before July 1, 2026 to total days, and 9.3% multiplied by the ratio of days after June 30, 2026 to total days.
Because Ontario's general rate of 11.5% is unchanged, that produces an equivalent shortcut for the effective provincial tax rate in a straddle year:
(3.2% × days before July 1, 2026 + 2.2% × days after June 30, 2026) ÷ total days in the taxation year
Calendar-year corporations get 181 days at the old rate and 184 days at the new one, which produces a blended Ontario rate of 2.696% for 2026. The full 2.2% arrives in the 2027 taxation year.
Corporations with a non-calendar fiscal year land wherever their year sits relative to the change date. A year-end shortly after June 30, 2026 captures very little of the reduction. A year-end well into 2027 captures most of it.
Two cautions follow from this table.
First, the differences between fiscal year-ends are a one-time timing effect, not a permanent advantage. Every corporation reaches 2.2% once it has a taxation year falling entirely after June 30, 2026. Changing your corporate year-end requires CRA approval and a sound business reason, and the one-time amounts involved here are modest relative to the administrative consequences.
Second, a blended rate is only as reliable as the figures underneath it. The proration applies to your Ontario small business income for the year, so the split depends on accurate financial records and a correctly determined business limit. If your books are behind, this is the year to catch up, because a restated income figure changes the tax at two different rates. Maintaining bookkeeping through the year supports a year-end calculation based on final figures rather than estimates. Preparing an accurate corporate income tax return for a straddle year involves an additional step compared with an ordinary year.
Ontario Small Business Tax Calculation Examples
The examples below show combined federal and Ontario corporate tax on qualifying active business income. Each assumes a CCPC operating solely in Ontario with a taxation year falling entirely after June 30, 2026, income fully within the $500,000 business limit, no associated corporations, no taxable capital or passive income restrictions, and no credits or loss carryforwards. Real returns rarely present this cleanly. Treat these as illustrations of the mechanics, not as advice for your corporation.
Example: $100,000 of Qualifying Business Income
The corporation keeps an additional $1,000 inside the company.
Example: $250,000 of Qualifying Business Income
Example: $500,000 of Qualifying Business Income
At the business limit the saving reaches its ceiling of $5,000, because there is no further income eligible for the small business rate.
What Is the Ontario Small Business Deduction?
The Ontario small business deduction is the mechanism that produces the low rate. It is not a separate grant or rebate, and there is no application to file.
Ontario taxes every corporation at 11.5% to begin with. The small business deduction then reduces that tax by a set percentage of the corporation's Ontario small business income. That percentage is 9.3% for days in a taxation year after June 30, 2026, which produces an effective rate of 2.2%. A taxation year that straddles the change date uses the prorated calculation described earlier rather than the 9.3% rate for the whole year.
Part 2 of Schedule 500, Ontario Corporation Tax Calculation, is the worksheet used to calculate the deduction, and it does not generally need to be filed with the return. The deduction amount is reported through Schedule 5, Tax Calculation Supplementary – Corporations, as applicable.
Two mechanical details are easy to miss and change the answer.
Ontario small business income cannot exceed Ontario taxable income. The deduction is capped by the income actually attributed to Ontario, so a corporation with losses or unusual adjustments may claim less than it expects.
Corporations operating in more than one province apply an Ontario domestic factor. This is the ratio of Ontario taxable income to taxable income earned across all provinces and territories. A corporation with permanent establishments in Ontario and Alberta does not apply Ontario's 2.2% to its entire income. It applies each province's rate to the income allocated there, which means the benefit of Ontario's cut is proportional to how much of the business is genuinely Ontario-based.
This is also why "qualifying income" and "net income" are rarely the same number. The small business rate applies to active business income within the limit, after the reductions described earlier. Investment income, income above the limit, and income allocated to other provinces all follow different paths.
What Happens When Business Income Exceeds $500,000?
Assuming the corporation has the full $500,000 federal and Ontario business limits, active business income above that limit is generally subject to the 15% federal and 11.5% Ontario general corporate rates, for a combined 26.5% before any applicable credits or special rules.
That assumption matters. As noted earlier, the federal and Ontario business limits can differ for the same corporation in the same year, most commonly where passive investment income has reduced the federal limit but not the Ontario one. Where the two limits differ, the federal and provincial calculations have to be run separately rather than against a single threshold.
The step up is steep. Every dollar that crosses the limit is taxed 15.3 percentage points higher than the dollar before it, and there is no phase-in.
A corporation with $600,000 of active business income and a full business limit pays:
Growing past the limit changes the questions worth asking. Is the business limit being allocated efficiently across an associated group? Is the corporation approaching the $10 million taxable capital threshold? Is investment income accumulating to the point where it affects the federal limit? Does the general rate change the case for reinvesting inside the corporation versus paying profits out?
These are the points where the calculation is no longer self-evident, and where corporate tax planning is best undertaken before year-end rather than after it.
How the New Ontario Tax Rate Could Affect Your Business
Corporate tax liability decreases. The maximum benefit is $5,000 a year, and only for corporations earning at or above the business limit in a taxation year taxed entirely at the new rate. A corporation earning $150,000 of qualifying income saves $1,500.
More after-tax cash stays inside the corporation. At the business limit, retained after-tax income rises from $439,000 to $444,000. For businesses that fund growth internally, that is the most meaningful effect: capital that would have gone to the province is available for equipment, hiring or working capital instead.
Cash-flow timing shifts before the tax bill does. Because the first affected year uses a blended rate, the reduction shows up gradually. Corporations that budget corporate tax as a fixed percentage of profit should update the assumption to the blended rate for the straddle year rather than jumping straight to 11.2%.
Instalments should be reviewed. For Parts I, VI, VI.1 and XIII.1 tax, the CRA sets out three options for calculating the least amount a corporation must pay by instalment, under subsections 157(1) and 157(3): the estimated tax payable for the current tax year; the tax payable for the previous tax year; or a combination that bases the first payment on the tax payable for the year before the previous tax year and spreads the balance of the previous year's tax across the remaining payments. Instalments are generally monthly, though eligible CCPCs that meet the compliance conditions may pay quarterly.
A corporation using the current-year estimate may be remitting more than required once the lower rate is reflected in its projections. Reviewing corporate tax instalments after the blended rate is known helps keep remittances aligned with the expected liability.
Salary versus dividends warrants review, without a predetermined answer. Two changes are relevant. The corporate rate reduction affects the after-tax income available inside the corporation. Separately, Ontario is reducing its non-eligible dividend tax credit rate from 2.9863% to 1.9863%, effective January 1, 2027, which increases the personal tax payable when corporate profits taxed at the small business rate are distributed as non-eligible dividends.
Neither change points to a single answer. The appropriate compensation mix depends on the shareholder's personal marginal tax rate, CPP contributions, RRSP contribution room, whether the corporation retains or distributes its profits, the level of retained earnings, the timing of distributions relative to January 1, 2027, and other circumstances specific to the corporation and its shareholders. Our overview of salary versus dividends sets out the framework, and the conclusion should be reached case by case.
Should Ontario Business Owners Change Their Tax Strategy in 2026?
For most incorporated businesses, a one point rate cut does not justify restructuring. It does justify a review of items that are easy to leave on autopilot.
Corporate year-end. Identify which blended rate applies to your current taxation year so that projections are accurate. Changing a year-end requires CRA approval and should be assessed on its overall merits rather than on this rate change alone.
Compensation mix. Revisit the salary and dividend split before January 2027, when the dividend tax credit change takes effect. This is the item with a genuine deadline attached.
Instalment base. Confirm which method your corporation uses and whether the remittance still matches the expected liability.
Small business deduction eligibility. Check the items that quietly erode the limit: associated corporation allocations, taxable capital approaching $10 million, and adjusted aggregate investment income above $50,000. Remember that the last of these reduces your federal limit while leaving Ontario's intact, so the two calculations must be run separately.
Growth and taxable income. If the corporation is trending toward $500,000 of active business income, model the 26.5% band before you get there rather than discovering it at year-end.
Year-end planning generally. Timing of expenses, capital purchases, bonus accruals and dividend declarations all interact with a rate change. The blended year is the one where careful sequencing matters most.
If you would like a second set of eyes on any of these, our corporate tax services and tax strategy for your corporation cover exactly this ground for Ontario businesses.
Ontario Small Business Tax Rate 2026: Key Takeaways
- Ontario's small business corporate income tax rate is 2.2%, down from 3.2%, for days in a taxation year after June 30, 2026.
- The change is law under Bill 97, which received Royal Assent as Statutes of Ontario 2026, chapter 2.
- Combined with the unchanged federal rate of 9%, the total small business rate is 11.2%.
- Ontario's business limit stays at $500,000. Reports of a $600,000 limit refer to a bill that did not pass.
- Taxation years straddling July 1, 2026 use a day-weighted blended rate. Calendar-year corporations pay 2.696% provincially for 2026.
- The maximum annual saving is $5,000, reached only at the full business limit in a year taxed entirely at the new rate.
- Where the full federal and Ontario limits are available, active business income above the limit is generally subject to the 15% federal and 11.5% Ontario general rates, a combined 26.5%.
- Passive investment income above $50,000 grinds the federal business limit but not the Ontario one.
- Ontario's non-eligible dividend tax credit rate drops on January 1, 2027, which offsets part of the corporate saving on distributed profits.
Frequently Asked Questions
What is the small business tax rate in Ontario in 2026?
2.2% provincially for days after June 30, 2026, and 3.2% for days before July 1, 2026. Combined with federal tax, the rate is 11.2%.
When does Ontario's 2.2% small business tax rate take effect?
July 1, 2026. It applies to days in a taxation year falling after June 30, 2026, so a corporation only pays a straight 2.2% once it has a taxation year that begins on or after July 1, 2026.
What is the combined federal and Ontario small business corporate tax rate?
11.2%, being 9% federal plus 2.2% Ontario. It was 12.2% before the change.
Who qualifies for the Ontario small business tax rate?
A Canadian-controlled private corporation, throughout the taxation year, on active business income earned through a permanent establishment in Ontario, within its available business limit.
Does the 2.2% Ontario rate apply to all corporate income?
No. It applies only to active business income within the business limit. Investment income, personal services business income and income above the limit are generally subject to Ontario's 11.5% general corporate rate.
What happens if my corporation earns more than $500,000?
Assuming the full business limits are available, the excess is generally subject to Ontario's 11.5% general rate, or 26.5% combined with federal tax. Only income within the limit receives the small business rate, and the limit is shared across associated corporations.
How is the Ontario corporate tax rate calculated if my fiscal year includes July 1, 2026?
By days. Multiply 3.2% by the days before July 1, 2026, add 2.2% multiplied by the days after June 30, 2026, and divide by the total days in the taxation year. A calendar 2026 year produces 2.696%.
Does the Ontario small business corporate income tax rate apply to sole proprietors?
No. Corporate tax rates apply to corporations. A sole proprietor reports business income on a personal return at graduated personal rates. The gap between the two is one of the reasons business owners consider incorporating, although the decision depends on far more than the headline rate.