Ontario’s Business Tax-Rate Cut Started July 1

Federal and Ontario corporate income tax rates

The tax cut applies to income eligible for Ontario’s small-business deduction, which is active business income earned in Canada by a Canadian-Controlled Private Corporation (CCPC) up to a maximum of $500,000 per year.

“The lower corporate tax rate will boost after-tax cash within the corporation and provide more flexibility for reinvestment or distributions,” says Kayla Brownrigg, a tax expert at TurboTax Canada.

Ontario is among a growing list of provinces cutting business taxes. The Canadian Federation of Independent Business (CFIB) notes that the governments of Quebec, Prince Edward Island, Nova Scotia, and Newfoundland and Labrador have also recently lowered their tax rates. The CFIB is calling for the provincial and federal governments to raise the small-business deduction threshold to at least $700,000 from $500,000—where it has been since 2009—and index it to inflation.

What does Ontario’s small-business tax-rate cut mean for you?

Lower taxes should help entrepreneurs manage higher costs and navigate periods of economic uncertainty, including the US tariffs, which CFIB research shows have impacted almost three-quarters of Ontario’s small businesses. The CFIB says many small businesses plan to invest tax savings in their businesses by expanding operations, increasing employee compensation, and hiring new employees.

How much could they reinvest? Consider a company with active business income of $250,000 a year. The one percentage point cut to 2.2% from 3.2% means a savings of $2,500 ($250,000 × 1% = $2,500). For a company with $500,000 in active business income, that’s a savings of $5,000 annually ($500,000 × 1% = $5,000).

“A lower corporate tax rate increases flexibility for small businesses, but the real benefit depends on how and when those earnings are used,” says Brownrigg. “Many business owners will hear ‘tax cut’ and assume it’s straightforward, but the interaction between corporate tax rates and dividend tax credits makes the outcome more nuanced.”

What about the dividend tax credit rate?

To align with the reduction in the small-business corporate income tax rate, the Ontario government is also reducing the small-business non-eligible dividend tax credit rate to 1.9863% from 2.9863%, effective January 1, 2027. This means that the top marginal personal income tax rate for non-eligible dividends will increase to 48.89% next year, from 47.74%.

“While the tax credit is being lowered, it will still reflect that the corporation paid less tax through what’s known as ‘integration,’” says Brownrigg.

Integration is the principle that the total tax paid should be roughly the same whether income is earned personally or through a corporation. Tax integration prevents double taxation for incorporated businesses and helps business owners align their total tax bill with what they would pay personally.

Brownrigg says the difference may not seem like a lot, but it could affect planning considerations, including how much income to invest in and outside of the corporation.

Planning considerations for business owners

From an integration perspective, the Ontario tax changes could mean more tax owing on investment income earned in the corporation, such as stocks, bonds, or rental properties, or what’s known as passive income.

Before the changes, the combined corporate and personal tax rate on investment income was 57.93%, or a 4.4% cost. As of July 1, the combined rate increases to 58.86%, or a 5.33% cost.

Business owners with substantial retained income in their corporations may want to consider taking more non-eligible dividend payouts in the latter half of 2026 to lock in the higher personal dividend tax credit, says Brownrigg.

With the help of a tax expert, business owners can also take advantage of the Refundable Dividend Tax On Hand (RDTOH), a special tax account for CCPCs. It allows the corporation to recover a portion of the corporate taxes paid on passive investment income (such as interest or capital gains) when it pays out taxable dividends to its shareholders.

Business owners can also maximize their capital dividend account (CDA), which tracks tax-free surpluses accumulated by a CCPC. “Getting money out of a CDA requires special filings with the CRA, but it can be a smart way to get tax-free money out of the corporation when the time is right,” says Brownrigg.

Another option is to reinvest more of the savings into the business. For instance, business owners can invest in capital assets, such as equipment, machinery, and buildings, to take advantage of enhanced write-off measures introduced by both the Ontario and federal governments.

The bottom line

While a lower corporate tax rate makes leaving money in the corporation more attractive, a lower dividend credit makes it less attractive to take it out later.

Business owners should work with a tax professional to ensure they’re making the most of the lower tax rate, while also taking into consideration the reduced small-business non‐eligible dividend tax credit rate, says Brownrigg. “While tax-rate changes create opportunities, planning determines the actual benefit.”