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%. The cut was legislated through Bill 97, Plan to Protect Ontario Act (Budget Measures), 2026, which received Royal Assent on March 26, 2026. The Ontario small business limit itself — the amount of active business income eligible for the reduced rate — is unchanged at $500,000, shared federally and provincially. For Toronto-area owner-managed corporations, the practical question a month in is what to actually do about the cut: how the mid-year change affects instalments already paid on the old rate, how the reduction gets prorated for a fiscal year that straddles July 1, 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. Bill 97, Plan to Protect Ontario Act (Budget Measures), 2026, sets the small business deduction rate at 9.3% (against the 11.5% general rate) for days in a taxation year after June 30, 2026 — the mechanism behind the drop from a 3.2% to a 2.2% reduction, 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 $500,000 limit did not change — and it is still shared
Ontario's small business limit — the ceiling on active business income eligible for the reduced rate — stays at $500,000, matching the federal limit. Bill 97 changes the rate applied below that ceiling; it does not touch the dollar threshold itself. A separate private member's bill, the Cutting Taxes on Small Businesses Act, 2025 (Bill 12), proposed raising the limit to $600,000, but it only reached First Reading in the Ontario Legislature on May 6, 2025 and never became law — it is not part of the rules a Toronto CCPC files under for 2026.
What is worth checking is that the $500,000 limit is still shared among associated corporations — if your business is grouped with related companies under common control, the group divides one $500,000 limit, not $500,000 each — and that it still grinds down as taxable capital employed in Canada rises past $10 million, disappearing entirely at $50 million. Neither of those rules moved with the July 1 rate cut; only the rate applied to income under the (unchanged) ceiling did.
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.
- Confirm the $500,000 small business limit is being applied correctly across any associated corporations — the limit is unchanged, but a group of related companies still splits one limit, not one each.
- 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 $500,000 limit still grinds down between $10 million and $50 million regardless of the rate cut.
The bigger picture
The rate cut doesn't require an urgent filing or a hard deadline the way a compliance shift does — there is no penalty for not knowing about it. But it is 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 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 is unchanged at $500,000, shared with the federal limit and split among associated corporations — the proposed $600,000 limit (Bill 12) never became law.
- 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, regardless of the July 2026 rate cut.
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.