Ontario Small Business Tax Cut, July 2026 — The Owner-Manager Playbook

Quick answer (60 words)

Effective July 1, 2026, Ontario cuts the small business corporate income tax rate from 3.2% to 2.2% and raises the business limit from $500,000 to $600,000. For an Ontario Canadian-controlled private corporation (CCPC), the combined federal-plus-provincial small business rate drops from 12.2% to 11.2%, and an extra $100,000 of active business income now qualifies for that low rate.

Author: Bader A. Chowdry, CPA, CA, LPA — Founder, Insight Accounting CPA Professional Corporation, Mississauga, Ontario. Owner-manager tax planning, T2 corporate filings, and CSRS 4200 compilation engagements.

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What changed, in one paragraph

The Government of Ontario tabled Bill 12, the Cutting Taxes on Small Businesses Act, 2025, as part of the 2025-26 provincial budget. The Bill amends Ontario’s Corporations Tax Act to (a) lower the Ontario small business corporate income tax rate from 3.2% to 2.2% effective July 1, 2026 (prorated for taxation years straddling July 1, 2026), (b) raise the Ontario small business income limit from $500,000 to $600,000 of active business income earned through a permanent establishment in Ontario, and (c) reduce Ontario’s small business (non-eligible) dividend tax credit rate from 2.9863% to 1.9863% effective January 1, 2027 so the integration math stays roughly aligned. Federal rates are unchanged. The federal small business deduction continues to apply to the first $500,000 of active business income shared across the associated group, so for federal purposes only the first $500,000 still qualifies for the 9% federal rate. The Ontario change creates a $100,000 band between $500,000 and $600,000 where the federal general rate applies but the Ontario small business rate still applies.

This is a small change in the rate table and a much bigger change in the planning behaviour it should trigger.

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The new rate table for an Ontario CCPC

Here is the combined federal-plus-Ontario corporate income tax rate for an Ontario-resident CCPC across the relevant income bands, before and after July 1, 2026:

Before July 1, 2026 (calendar year 2025 and the first half of 2026):

Income band	Federal rate	Ontario rate	Combined
First $500,000 of active business income	9.0%	3.2%	12.2%
Active business income $500,001 and up	15.0%	11.5%	26.5%
Investment income (CCPC)	38.67% (refundable mechanics apply)	11.5%	~50.17% (gross)

After July 1, 2026 (full year 2027 onward):

Income band	Federal rate	Ontario rate	Combined
First $500,000 of active business income	9.0%	2.2%	11.2%
$500,001 – $600,000 of active business income	15.0%	2.2%	17.2%
Active business income $600,001 and up	15.0%	11.5%	26.5%
Investment income (CCPC)	38.67%	11.5%	~50.17%

Two things to read out of this table:

First, the $100,000 wedge between $500,000 and $600,000 is taxed at 17.2% combined — much lower than the 26.5% general rate that applied to that band under the old rules. On a corporation that hits the band, the cash deferral compared with the general rate is $9,300 per year. Compared with personal tax at top Ontario rates of roughly 53.5%, the deferral against immediate distribution is around $36,300 per year.

Second, the headline rate cut on the first $500,000 is one percentage point. On a corporation that fully uses the small business deduction every year, that is $5,000 of saved corporate tax per year for the rest of the corporation’s life. That is small in absolute terms but it is permanent, and it compounds inside any retained-earnings investment strategy.

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Stub-period mechanics — why the July 1 effective date matters

The Ontario rate change is prorated for taxation years that straddle July 1, 2026. The way it works on a T2 is a weighted-average rate based on the number of days in the fiscal year falling before and after the effective date.

Worked example — corporation with a December 31, 2026 year-end:

• Days at the old 3.2% Ontario rate: January 1 – June 30, 2026 = 181 days.
• Days at the new 2.2% Ontario rate: July 1 – December 31, 2026 = 184 days.
• Blended Ontario small business rate for the 2026 taxation year: (181 × 3.2% + 184 × 2.2%) ÷ 365 = approximately 2.70%.
• Blended combined small business rate: 9.0% federal + 2.70% Ontario = 11.70%.

Worked example — corporation with a June 30, 2026 year-end (which is the most common medical-professional-corporation year-end on our roster):

• Days at the old 3.2% Ontario rate: July 1, 2025 – June 30, 2026 = the entire 365 days of the fiscal year.
• This corporation gets the rate cut only starting with its July 1, 2026 – June 30, 2027 fiscal year. The full benefit comes a year earlier for December year-ends than for June year-ends.

This is the kind of structural detail that decides whether you should bring an upcoming bonus, dividend, or asset sale into the current fiscal year or push it into the next one. It is not a “talk to your accountant” platitude; it is a calculable decision with a specific dollar answer.

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Five planning moves to make before July 1, 2026

These are the moves Insight Accounting CPA is running with clients between now and July 1, 2026. Not all of them apply to every corporation — that is part of the engagement. The point is that the rate change is a real planning event, not a press release.

Move 1 — Re-run your salary-versus-dividend split for the post-July-1 world. Integration math drives whether you should pay yourself in salary or dividend. The Ontario corporate rate goes down by one point on the first $500,000; the Ontario non-eligible dividend tax credit goes down by one point on January 1, 2027. Net of those two changes, integration on non-eligible dividends out of small business income stays roughly neutral. But the timing offset between mid-2026 (corporate rate already lower) and early 2027 (dividend tax credit not yet lower) creates a six-month window where non-eligible dividends are slightly more tax-efficient than they will be afterwards. For owner-managers who have GRIP or RDTOH on the corporate balance sheet, the window is real. We model it for every client at the year-end review.

Move 2 — If your associated group’s income is between $500,000 and $600,000, reassess the allocation of the business limit across the group. The Ontario business limit is $600,000 after July 1, 2026, but the federal business limit stays at $500,000. The allocation form (T2 Schedule 23 federally; T2 Schedule 511 in Ontario) is filed by every CCPC in an associated group, and the allocations do not have to be identical for federal and Ontario purposes. Group of companies that have been pushing income out of one CCPC into another to stay under $500,000 may find that they can leave more income in the operating company under the new Ontario rules.

Move 3 — Re-time large bonuses and RDTOH-driving dividends. A bonus accrued in the corporation that is paid before the fiscal year-end is deductible at the (high) general rate if the bonus pushes the corporation above the small business limit. After July 1, 2026, that math shifts because the Ontario portion of the general rate has not changed (still 11.5%) but the Ontario portion of the small business rate has dropped. Bonuses that are properly accrued and paid within 180 days under paragraph 78(4) of the Income Tax Act are powerful, but they need to be modelled against the new rate table.

Move 4 — Re-confirm passive-income claw-back exposure. The federal small business deduction grind starts at $50,000 of “adjusted aggregate investment income” (AAII) and fully eliminates the deduction at $150,000. The Ontario provincial small business deduction is also subject to a grind from passive income above $50,000 under section 31.1.1 of the Ontario Taxation Act, 2007. Both grinds continue to apply after July 1, 2026. A corporation that has been close to the $50,000 AAII threshold should re-run the projection — losing the new lower 2.2% Ontario rate to a passive-income grind costs more on a per-dollar basis than losing the old 3.2% rate did, simply because the spread between the small business rate and the general rate has widened slightly.

Move 5 — Tighten the integration of CCA-eligible capital purchases with the rate cut. Ontario announced enhanced accelerated capital cost allowance provisions in the same budget. Combined with the existing federal Accelerated Investment Incentive and the rate cut, capital equipment purchased in the fiscal year that includes July 1, 2026 may be eligible for both an accelerated first-year deduction and a lower tax rate on the income shielded by that deduction. For real estate developers and skilled-trades contractors on our roster, this is a calculable advantage.

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How the change interacts with TOSI, GRIP, RDTOH, and CDA

The rate change is one line in a T2 schedule. The mechanics it touches are not.

• TOSI (Tax on Split Income, section 120.4 ITA): unchanged. Family-member dividends from an Ontario CCPC are still subject to the TOSI rules unless an exception applies (excluded share, excluded business, age-25 plus contribution, etc.). The rate change does not loosen TOSI.
• General Rate Income Pool (GRIP): GRIP is the tracking account that supports eligible dividend designations. Because the Ontario rate change applies only to the small business deduction band, it does not change how much GRIP gets added to the pool in a year — GRIP additions are still computed from income taxed at the general rate. The window between mid-2026 and early-2027 with the dividend tax credit transition can still affect when to distribute eligible dividends, but the calculation of the pool itself is unchanged.
• Refundable Dividend Tax on Hand (RDTOH): the eligible RDTOH (ERDTOH) and non-eligible RDTOH (NERDTOH) pools and the related Part IV tax and refundable Part I tax mechanics are unchanged.
• Capital Dividend Account (CDA): unchanged. Capital dividends remain tax-free on receipt and the CDA balance is unaffected by the corporate tax rate. The decision of when to declare a capital dividend continues to turn on whether the corporation has paid out enough non-eligible dividends to use the NERDTOH, and on the corporation’s projected sale or wind-up.

For Insight Accounting CPA’s typical owner-managed client, the practical takeaway is that the rate change should not change the bigger structural decisions (whether to incorporate, whether to use a holdco, whether to have a family trust) but it does change the year-by-year cash-flow calibration of compensation. That is where the planning value lives.

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Who benefits the most, in dollar terms

We model this for every prospective client during the discovery call. Three ICPs on our roster see the biggest dollar impact.

Medical professional corporations (MPCs): the typical incorporated Ontario specialist earns $400,000 to $750,000 in net professional income. After paying lifestyle costs and an RRSP-optimized salary, the residual in the corporation is usually between $150,000 and $300,000. That residual is taxed at the small business rate. A one-point cut on $200,000 of residual is $2,000 per year of compounding tax deferral.

Real estate developers organized as multi-project CCPCs: developers commonly run between $300,000 and $1.2 million of taxable income per project corporation per year. The new $600,000 Ontario business limit is significant for them — the $100,000 wedge taxed at 17.2% rather than 26.5% saves $9,300 per project corporation per year. For developers with five active project CCPCs, that is $46,500 per year of permanent savings.

Group of companies with an opco-holdco structure: the rate change re-opens an old question that many owner-managers stopped asking when the small business limit was last frozen. The question is whether to push income up into the holdco via inter-corporate dividends, or to keep more income in the opco where it is taxed at the small business rate. The answer depends on the holdco’s investment plan and on the AAII profile. We re-run this on every annual planning call.

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What we are doing for clients between now and July 1, 2026

1. Re-running the 2026 and 2027 corporate tax projection on every active engagement before May 31, 2026, with the new rate table baked in.
2. Re-issuing the year-end bonus-versus-dividend memo to every owner-manager on a salary-plus-bonus structure, scheduled to land in the client’s inbox at least 90 days before their fiscal year-end.
3. Reviewing every Schedule 23 / Schedule 511 business limit allocation in associated groups where total active business income is between $400,000 and $700,000. The new Ontario business limit makes the optimal allocation different from the federal-optimal allocation, and the schedule needs to reflect both.
4. Updating the corporate tax projection inputs in our internal salary-versus-dividend calculator and our SR&ED refund estimator so that the post-July-1 rates are used for any forecasts that touch fiscal periods after June 30, 2026.
5. Adding a line to the engagement letter for the 2026 corporate tax season explicitly disclosing that the rate change is incorporated into the filing.

This is the kind of disciplined, calendar-anchored, calculation-driven planning that an owner-managed CCPC client should expect from any CPA, CA, LPA-led firm. If your current accountant has not raised the Ontario rate cut with you yet, ask why.

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FAQ — Ontario small business tax cut July 2026

Q: When exactly does the new Ontario small business rate take effect?

A: July 1, 2026. For taxation years that straddle July 1, 2026, the rate is prorated based on the number of days in the fiscal year falling before and after that date.

Q: Does my federal corporate tax rate change?

A: No. The federal small business deduction rate stays at 9% on the first $500,000 of active business income, and the federal general rate stays at 15%. Only Ontario’s portion is changing.

Q: My corporation’s active business income is $560,000. Do I get the new lower rate on all of it?

A: You get the new Ontario small business rate of 2.2% on the full $560,000 (assuming nothing else changes about your associated group and passive income). You also get the federal small business deduction at 9% on the first $500,000. The remaining $60,000 is taxed at the federal general rate of 15%. Combined, your first $500,000 is at 11.2% and your next $60,000 is at 17.2%.

Q: I have a June 30 year-end. When do I get the benefit?

A: Your fiscal year ending June 30, 2026 is entirely before the effective date, so it is taxed at the old 3.2% Ontario rate. Your fiscal year ending June 30, 2027 is entirely after the effective date, so it is taxed at the new 2.2% Ontario rate. A December 31 year-end gets the benefit a year earlier (blended in 2026 calendar year).

Q: What about the Ontario dividend tax credit?

A: The non-eligible dividend tax credit rate drops from 2.9863% to 1.9863% effective January 1, 2027. The timing offset means that non-eligible dividends paid in the second half of 2026 and the very first days of 2027 sit in a small window where the corporate rate has dropped but the personal dividend tax credit has not yet adjusted.

Q: Should I prepay tax before July 1 to lock in anything?

A: No. Corporate tax instalments are reconciled to the actual annual liability when the T2 is filed, so prepaying does not lock in a rate. What you may want to consider is the timing of bonuses and dividends — those are real planning decisions, not instalment decisions.

Q: Does this affect a Personal Service Business (PSB)?

A: No. Personal service businesses are explicitly excluded from the small business deduction and are taxed at the full federal corporate rate plus Ontario’s general corporate rate. PSBs continue to be a structurally bad choice for incorporated professionals — the rate cut does not change that.

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Case study — Mississauga incorporated specialist, December year-end

A Mississauga internal-medicine specialist operates through a Medical Professional Corporation with a December 31 year-end. 2026 projected net professional income before doctor compensation is $585,000. Lifestyle costs and RRSP-maximizing salary leave roughly $230,000 to be taxed inside the MPC.

Under the old rate table for a full 2026 calendar year, that $230,000 would have been taxed at 12.2%, producing roughly $28,060 of corporate tax. Under the prorated 2026 rate (approximately 11.70% combined), the same $230,000 is taxed at $26,910 — a $1,150 saving compared with what the same dollar of income would have cost in 2025. Starting January 1, 2027, the full year at 11.2% combined produces $25,760 of tax — a $2,300 annual permanent saving compared with the old rate, every year forward, on the same residual income.

Compounded over a 25-year career inside the MPC and reinvested at a conservative 5% after-tax rate, the running saving has a present value north of $40,000 in today’s dollars. That is real money from a one-point rate change.

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Closing — what to do next

For Bader’s clients, no action is needed. We have already updated our planning models, our compilation engagement working papers, and our year-end memos to reflect the new rates. The next quarterly planning call on your file will walk through what the change means for your specific situation.

For non-clients reading this, the short list is: (1) ask your accountant whether the rate cut has been incorporated into your 2026 corporate tax projection, (2) review whether your salary-versus-dividend split for 2026 still makes sense, and (3) confirm that your associated-group business limit allocations on Schedules 23 and 511 reflect the new Ontario limit. If you would like an independent second opinion, book a free 30-minute discovery call at https://insightscpa.ca/free-consultation/.

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