Ontario Small Business Tax Rate 2026: The Essential Guide to the 2.2% Cut
The Ontario small business tax rate 2026 change is the biggest provincial tax cut for small corporations in years. Starting July 1, 2026, Ontario’s rate on the first $500,000 of active business income drops from 3.2% to 2.2%. Here is what it means for your corporation, how the proration works, and what your bookkeeping needs to get right.
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Ontario small business tax rate 2026: what changed
The Ontario government announced the cut in its budget on March 26, 2026. It applies to Canadian-controlled private corporations (CCPCs) that qualify for the small business deduction.
| Item | Before July 1, 2026 | From July 1, 2026 |
|---|---|---|
| Ontario small business rate | 3.2% | 2.2% |
| Federal small business rate | 9% | 9% |
| Combined rate | 12.2% | 11.2% |
| Income eligible | First $500,000 | First $500,000 |
According to PwC’s Ontario budget summary, the cut can save a CCPC up to $5,000 a year.
How much will your corporation save?
The saving is 1% of your active business income up to $500,000.
- $100,000 of active business income saves $1,000 a year.
- $250,000 saves $2,500 a year.
- $500,000 or more saves $5,000 a year.
Income above $500,000 is taxed at the general corporate rate and does not benefit from this change.
Proration for 2026 year-ends
Because the cut starts mid-year, the rate is prorated by the number of days in your tax year before and after July 1, 2026.
December 31 year-end
Half the year is at 3.2% and half at 2.2%, for an effective Ontario rate of about 2.7%. The combined rate for 2026 comes to roughly 11.7%. From January 1, 2027, it is a flat 11.2%.
Non-calendar year-ends
A corporation with a March 31, 2027 year-end has 91 days at the old rate and 274 days at the new rate. Your bookkeeper should confirm the day count in the tax software and not rely on a round 50/50 split.
Who does not get the full Ontario small business tax rate 2026 benefit
Several federal rules reduce or share the $500,000 limit, and the Ontario rate follows them.
- Associated corporations must share one $500,000 business limit.
- The limit shrinks when adjusted aggregate investment income passes $50,000 and is gone at $150,000.
- The limit also shrinks when taxable capital of the associated group is between $10 million and $50 million.
- Personal services businesses and non-CCPCs do not qualify for the small business deduction.
If you hold investments inside your operating company, tracking passive income each year matters more now that the gap between the small business rate and the general rate is wider.
What your bookkeeping should do now
- Update your tax provision rate in your accounting software so monthly financial statements show the right expense.
- Review your corporate tax instalments. Lower tax may mean lower instalments for the rest of the year.
- Separate active business income from investment income in your chart of accounts.
- Confirm which corporations in your group are associated.
- Plan salary and dividend mix with your accountant, since after-tax results change when corporate tax drops.
- Keep capital asset records clean if you plan to use the accelerated capital cost allowance measures Ontario mirrored from the federal rules.
Other Ontario 2026 budget items for business owners
- The Regional Opportunities Investment Tax Credit ends January 1, 2027. Qualifying spending before that date still counts.
- Ontario matched federal accelerated capital cost allowance for manufacturing and processing buildings, clean energy equipment and rental housing.
- Employers with funded benefit plans can elect to be treated as unfunded for insurance premium tax purposes, effective April 1, 2026.
For payroll updates this year, read our guide to CPP and EI rates for 2026.
Should you incorporate because of the cut?
A lower corporate rate makes leaving profit in the company more attractive. It helps most when you do not need all your business income to live on. If you take every dollar out as salary or dividends, the personal tax you pay offsets much of the saving.
Incorporation also brings costs: a separate T2 return, annual filings and more bookkeeping. Talk to a CPA before you decide.
Worked example: a Mississauga renovation company
Say your corporation earns $300,000 of active business income and has a December 31 year-end. Here is the Ontario small business tax rate 2026 effect on combined tax.
| Year | Combined rate | Corporate tax |
|---|---|---|
| 2025 | 12.2% | $36,600 |
| 2026 (prorated) | About 11.7% | About $35,100 |
| 2027 onward | 11.2% | $33,600 |
That is about $1,500 saved in 2026 and $3,000 a year after that, before any change in how you pay yourself.
Month-end close checklist for the rest of 2026
- Reconcile every bank and credit card account by the 10th of the next month.
- Code revenue to the right income type: active, rental, interest or dividends.
- Record HST collected and paid so your return matches your books.
- Book payroll and remittances in the same month they relate to.
- Track capital purchases separately from repairs.
- Save receipts digitally and link them to each transaction.
Clean monthly books make the year-end T2 faster and cheaper, and they let your accountant confirm the prorated rate without rebuilding your records.
Frequently asked questions
Will my 2026 instalments change?
They can. If your tax for 2026 is lower, you may base instalments on the current-year estimate. Ask your accountant before reducing them, since interest applies if you underpay.
Does the Ontario small business tax rate 2026 cut affect HST?
No. HST rates and filing rules are separate and did not change with this budget measure.
What is the Ontario small business tax rate in 2026?
It is 3.2% until June 30, 2026 and 2.2% from July 1, 2026, on the first $500,000 of active business income.
Do I need to do anything to get the lower rate?
No separate application is needed. Your T2 return and Ontario schedule apply the rate, but your records must support the income split.
Does the cut apply to sole proprietors?
No. It applies only to eligible corporations. Sole proprietors pay personal income tax on business profit.
Keep your books ready for the new rate
The Ontario small business tax rate 2026 cut only helps if your books show clean active business income and correct instalments. Corporate Empire provides bookkeeping for Ontario small businesses and corporations. Book a free consultation to review your 2026 records.
