Ontario Cut the Small Business Tax Rate to 2.2%. Your Dividend Plan Just Got Worse.
- 4 days ago
- 5 min read
Last reviewed: July 2026
Ontario reduced its small business corporate income tax rate from 3.2% to 2.2%, effective July 1, 2026. Combined with the 9% federal rate, an Ontario CCPC now pays 11.2% on active business income within the small business limit, down from 12.2%. Two things most owners have not been told: fiscal years straddling July 1, 2026 are prorated, so the first-year saving is smaller than the headline, and Ontario is separately cutting the small business dividend tax credit on January 1, 2027, which makes taking that money out personally more expensive.
At a glance
Item | Before | After | Effective |
Ontario small business rate | 3.2% | 2.2% | July 1, 2026 |
Federal small business rate | 9% | 9% | Unchanged |
Combined Ontario CCPC rate | 12.2% | 11.2% | July 1, 2026 |
Ontario small business dividend tax credit | 2.9863% | 1.9863% | January 1, 2027 |
Ontario general corporate rate | 11.5% | 11.5% | Unchanged |
Federal small business limit | $500,000 | $500,000 | Unchanged |
What the rate cut is actually worth
On $500,000 of active business income, a full percentage point is $5,000 a year in corporate tax.
That is real money for a business at that level. It is also less than it looks in year one, for a reason nobody puts in the headline.
Straddle years are prorated, and most of you have one
The rate changed mid-year. Unless your fiscal year end is June 30, part of your year is taxed at 3.2% and part at 2.2%, allocated on the number of days in each period.
A December 31 year end in 2026 gets 181 days at the old rate and 184 at the new one. On $500,000 of income within the small business limit, that is roughly $2,500 of saving in 2026, not $5,000. The full benefit arrives in your first complete fiscal year after July 1, 2026.
Worth knowing before you plan around a number that has not arrived yet.
The part nobody is talking about
Corporate tax went down. Personal tax on the money coming out is going up.
Ontario is reducing the small business dividend tax credit rate from 2.9863% to 1.9863%, effective January 1, 2027. That is deliberate. The dividend tax credit exists to prevent double taxation, and when the corporate rate falls, less corporate tax has been paid, so the credit is reduced to keep the integration arithmetic roughly intact.
The practical effect for an owner-manager:
Corporate tax on the earnings: lower, from July 1, 2026
Personal tax on non-eligible dividends paid out: higher, from January 1, 2027
The two changes land on different dates, six months apart
That gap is the planning opportunity, and it is also the trap. A mix of salary and dividends set in 2024 or 2025 was optimised against a different set of numbers on both sides. It is not automatically wrong now, but it is no longer automatically right either.
Who should actually recheck their mix
Not everyone. In rough order of how much it matters:
Owners taking most of their compensation as non-eligible dividends. You get the smaller corporate bill and the larger personal one. This is the group most affected
Owners planning a large dividend in late 2026 or early 2027. The credit change takes effect January 1, 2027, so timing a distribution across that date is a live question worth doing the arithmetic on
Businesses close to the $500,000 small business limit. The gap between 11.2% and the 11.5% general rate is now very narrow in Ontario, which changes how much the limit is worth defending
Anyone who set their compensation mix more than two years ago and has not revisited it
Less affected: owners paying themselves mostly salary, owners who leave earnings in the corporation for reinvestment, and businesses with income well below the limit where the absolute dollars are small.
What has not changed
Worth stating plainly, because the noise around a rate change tends to generate advice that overreaches.
The federal rate is still 9% and the small business limit is still $500,000
The Ontario general rate is still 11.5%, so the small business deduction is still worth protecting
The reasons to take salary have not moved. RRSP contribution room, CPP contributions, and a demonstrable income for mortgage purposes all still argue for salary regardless of the rate arithmetic
Passive income still grinds down the small business limit. Nothing in this change alters that
One more thing expiring
Not part of the rate change, but on the same schedule and easy to miss: the Regional Opportunities Investment Tax Credit expires January 1, 2027. If you have been considering a qualifying property acquisition in a designated region, the window is closing.
Frequently asked questions
What is the small business tax rate in Ontario in 2026?
From July 1, 2026, an Ontario CCPC pays 9% federal plus 2.2% Ontario, a combined 11.2% on active business income within the small business limit. Before that date the Ontario portion was 3.2%, for a combined 12.2%.
When did the Ontario small business tax rate change?
July 1, 2026. The reduction from 3.2% to 2.2% was announced in the 2026 Ontario Budget.
How does the rate change apply to my fiscal year?
Taxation years straddling July 1, 2026 are prorated between the two rates based on the number of days falling in each period. Only a fiscal year beginning on or after July 1, 2026 gets the full 2.2% rate for the whole year.
How much does the Ontario rate cut save me?
Roughly $5,000 a year on $500,000 of active business income within the small business limit, once you are in a full fiscal year at the new rate. In a straddle year it is proportionally less. A December 31, 2026 year end saves closer to $2,500.
Is the dividend tax credit changing in Ontario?
Yes. The Ontario small business dividend tax credit rate falls from 2.9863% to 1.9863%, effective January 1, 2027. This offsets part of the corporate rate reduction by increasing the personal tax payable on non-eligible dividends.
Should I take dividends before January 1, 2027?
It depends on your personal income for each year, the corporation's cash position, and whether you would otherwise be pushed into a higher personal bracket. The credit reduction makes a dividend paid in 2027 slightly more expensive personally than the same dividend paid in 2026, but that is one variable among several. Run the numbers on your own figures rather than acting on the direction of travel alone.
Does this change whether I should pay salary or dividends?
It moves the arithmetic slightly toward salary at the margin, because the corporation now pays less tax and the personal credit on dividends is being reduced. It does not overturn the non-tax reasons for salary, which are RRSP room, CPP contributions and demonstrable personal income. Anyone with a mix set before 2026 should have it rechecked.
Did the federal small business rate change?
No. The federal rate on active business income within the small business limit remains 9%, and the small business limit remains $500,000.
Key takeaways
Ontario's small business rate fell from 3.2% to 2.2% on July 1, 2026, making the combined Ontario CCPC rate 11.2%
Straddle years are prorated, so a December year end sees roughly half the benefit in 2026
The Ontario small business dividend tax credit drops from 2.9863% to 1.9863% on January 1, 2027, which raises personal tax on non-eligible dividends
The two changes land six months apart, which is where the planning question sits
Owners taking mostly dividends, and anyone planning a large distribution around year end, should recheck the arithmetic
The Regional Opportunities Investment Tax Credit expires January 1, 2027
Talk to an accountant about your compensation mix
Our team handles corporate tax, bookkeeping, HST and payroll for incorporated owner-managed businesses across Mississauga, Oakville, Vaughan, Markham, King City, Caledon and Burlington. Salary versus dividend planning against your actual numbers is routine work here, not a year-end afterthought.
Fixed fees quoted up front. Straight answers, no lecture.
References: 2026 Ontario Budget, Annex and CRA corporation tax rates. Figures current at July 2026. General information only, not advice on a specific situation.
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