Ontario's small business corporate income tax rate dropped from 3.2% to 2.2% today, a change tabled in the province's March budget and now in effect. Combined with the unchanged federal small business rate of 9%, the all-in rate on the first $500,000 of active business income earned by an eligible Canadian-controlled private corporation falls from 12.2% to 11.2%, worth up to $5,000 a year once the new rate applies for a full taxation year.
The cut is permanent and requires no election or application. It applies automatically to any CCPC earning active business income through a permanent establishment in Ontario, subject to the same eligibility conditions that already governed the small business deduction.
Who Actually Qualifies
The reduced rate is available to Canadian-controlled private corporations earning active business income, not passive investment income, with taxable capital employed in Canada under $10 million. The deduction phases out on a straight-line basis between $10 million and $50 million of taxable capital, calculated across any associated group of corporations. Ontario does not apply the federal passive-income test to its own small business deduction, so a CCPC with meaningful investment income inside the corporation can still access Ontario's lower provincial rate even if its federal small business deduction is being clawed back.
Corporations whose fiscal year straddles July 1, 2026 must prorate. A corporation with a December 31 year end applies the old 3.2% provincial rate to the first half of 2026 and the new 2.2% rate to the second half, producing a blended provincial rate of roughly 2.7% and a combined federal-provincial rate near 11.7% for the full calendar year. The full 11.2% combined rate only applies to taxation years that begin on or after July 1, 2026.
The Planning Bridge: A Six-Month Dividend Window
Ontario is also cutting its non-eligible dividend tax credit rate from 2.9863% to 1.9863%, but not until January 1, 2027. That creates a gap: the corporate rate is already lower today, while the personal dividend credit that offsets it has not yet moved. For an incorporated client who has flexibility over when to pay non-eligible dividends out of active business income, a payment made between now and December 31, 2026 is taxed more efficiently at the personal level than the identical payment made from January 2027 onward, when the reduced dividend credit raises the top combined federal-Ontario non-eligible dividend rate from 47.74% to 48.89%.
This is not a reason to distribute corporate retained earnings that would otherwise stay invested. It is a scheduling question for clients who were already planning a dividend payment in the near term, where the corporation has GRIP or refundable dividend tax on hand (RDTOH) sitting on the balance sheet and the timing is otherwise discretionary.
Where the Increased Limit Comes In
Ontario's provincial small business income limit, separate from the July 1 rate cut, sits at $600,000 under the province's own Corporations Tax Act, ahead of the federal business limit of $500,000. That creates a $100,000 band of active business income where the federal general rate of 15% applies but Ontario's small business rate still applies provincially, a detail that matters most for owner-managers running multiple associated CCPCs close to the federal ceiling, and one worth confirming with a corporate tax preparer given the layered nature of federal and provincial thresholds.
Ontario's blended 2026 rate applies to corporations with a December 31 fiscal year end that must prorate across the old and new rates. The 2027 figure applies once the new rate is in effect for a full taxation year.