Ontario's small business corporate income tax rate fell from 3.2% to 2.2% on July 1, 2026, a full percentage point cut that lowers the combined federal-Ontario small business rate from 12.2% to 11.2%. It arrived alongside a second, quieter change that took effect six months earlier: the Ontario small business limit — the amount of active business income eligible for the reduced rate — rose from $500,000 to $600,000 on January 1, 2026. For Toronto-area owner-managed corporations, both changes are now in force, and the practical question a month in is what to actually do about them: how the mid-year rate cut affects instalments already paid on the old rate, whether more of this year's income now qualifies for the lower bracket, and why a related dividend tax credit change scheduled for 2027 matters to how you pay yourself.
The rate cut, in detail
Ontario's Corporations Tax Act reduces the provincial tax rate on active business income earned by Canadian-controlled private corporations (CCPCs) up to the small business limit. Effective July 1, 2026, that reduced rate dropped from 3.2% to 2.2% — a roughly 30% cut to the provincial small business rate itself.
Combined with the unchanged federal small business rate of 9%, the all-in rate a qualifying Toronto CCPC pays on its first tranche of active business income is now 11.2%, down from 12.2%. On $500,000 of eligible income, that percentage-point difference is worth up to $5,000 a year — the figure the province cites in describing the cut's effect on the more than 375,000 Ontario small businesses it expects to benefit.
Source: Government of Ontario — 2026 Budget Highlights.
If your fiscal year straddles July 1, 2026
The rate change is not a clean January-to-December swap for every corporation. Because it took effect mid-calendar-year, Ontario prorates the rate for any tax year that straddles July 1, 2026: a corporation applies the old 3.2% rate to the portion of its tax year before July 1 and the new 2.2% rate to the portion on or after July 1, weighted by the number of days in each period.
This matters most for Toronto businesses with an off-calendar fiscal year-end — say, March 31 or September 30 — where a single T2 return now spans both rates. If your bookkeeping software or your accountant is calculating this year's provincial small business tax using a flat rate for the whole year, that calculation is wrong for any year-end other than June 30 or December 31; ask specifically how the proration was applied before you rely on the number for instalment planning.
The business limit increase most owners missed
The second change is easy to miss because it took effect earlier and got less press: as of January 1, 2026, the Ontario small business limit rose from $500,000 to $600,000 of active business income earned through a permanent establishment in Ontario. This was enacted through the Cutting Taxes on Small Businesses Act, 2025 (Bill 12), which amended the Corporations Tax Act to substitute "$600,000" for "$500,000" wherever the small business limit is defined.
Source: Legislative Assembly of Ontario — Bill 12, Cutting Taxes on Small Businesses Act, 2025.
For a Toronto CCPC that was earning active business income above the old $500,000 ceiling — a growing professional services firm, a busy trades or contracting business, a multi-location retailer — this is the more valuable of the two changes in absolute dollar terms. An additional $100,000 of income now taxed at the small business rate rather than Ontario's general corporate rate is worth several thousand dollars a year on its own, independent of the July rate cut. Note that the small business limit still phases out for CCPCs (or associated groups of CCPCs) with more than $10 million of taxable capital employed in Canada, and disappears entirely at $50 million — the increase does not change who is eligible, only how much income qualifies for those who are.
Why the 2027 dividend tax credit change belongs in this year's planning
Tied to the rate cut, Ontario is also reducing its non-eligible dividend tax credit rate from 2.9863% to 1.9863%, effective January 1, 2027. Non-eligible dividends are the type most owner-managers pay themselves out of a CCPC taxed at the small business rate, so this credit offsets some of the personal tax on that income. The province is lowering the credit specifically because the corporate-side small business rate just fell — it is the other half of the integration calculation that is supposed to keep total tax roughly neutral between salary and dividends.
The practical effect for a Toronto owner-manager: the corporate tax savings from the July 2026 rate cut are real, but part of that saving is offset starting in 2027 by slightly higher personal tax on non-eligible dividends drawn from that same income. If your salary-versus-dividend mix was set assuming the old rates on both sides, it is worth revisiting before year-end — not because either side changed dramatically on its own, but because they are designed to move together and a plan built on last year's numbers on only one side will be slightly off on both.
A practical checklist for Toronto-area CCPCs
- Confirm how your fiscal 2026 return is prorating the rate cut if your year-end falls anywhere other than June 30 or December 31 — this affects both the return itself and any instalments already remitted this year.
- Recheck whether more of your income now qualifies for the small business rate given the $600,000 limit, particularly if you were previously bumping against the old $500,000 ceiling.
- Revisit instalment estimates for the rest of 2026. If your instalment base was calculated before the rate change was confirmed, your remaining 2026 instalments may be overstated relative to what you'll actually owe.
- Flag the January 2027 dividend tax credit change now, not in December 2026, if your compensation plan relies on non-eligible dividends — it changes the personal-tax side of a decision your corporate accountant may already be revisiting because of the rate cut.
- Watch for the phase-out thresholds if your corporation (or an associated group) is approaching $10 million in taxable capital employed in Canada — the higher $600,000 limit does not help once the phase-out has started.
The bigger picture
Neither change requires an urgent filing or a hard deadline the way a compliance shift does — there is no penalty for not knowing about them. But both are already baked into how this year's and next year's tax bill will be calculated, whether or not your bookkeeping has caught up. For a Toronto CCPC with an off-calendar year-end, in particular, getting the proration and the higher limit reflected correctly in this year's instalments and next spring's T2 is worth a specific conversation with your accountant rather than assuming standard software defaults have it right.
Key takeaways
- Ontario's small business corporate income tax rate fell from 3.2% to 2.2% on July 1, 2026, prorated for tax years that straddle that date.
- The combined federal-Ontario small business rate is now 11.2%, down from 12.2%, worth up to $5,000 a year on $500,000 of eligible income.
- The Ontario small business limit rose from $500,000 to $600,000 on January 1, 2026 under the Cutting Taxes on Small Businesses Act, 2025 — a separate, earlier change worth checking against your current income level.
- Ontario's non-eligible dividend tax credit rate drops from 2.9863% to 1.9863% on January 1, 2027, partly offsetting the corporate-side savings for owner-managers who pay themselves in dividends.
- The small business limit still phases out between $10 million and $50 million of taxable capital employed in Canada — the increase changes the ceiling, not the eligibility rules.
If your fiscal year straddles July 1, your instalments need re-checking against the new rate, or your salary-dividend mix was set before either change, RN Canada works with Toronto-area owner-managed businesses on exactly this kind of corporate and personal tax coordination.