Corporate and personal tax
Ontario cut the small business rate to 2.2%, and the dividend credit is next
Last reviewed: August 2026
Ontario's small business tax rate fell to 2.2% on July 1, 2026. How a straddle year is prorated, and why the 2027 dividend tax credit cut works against it.
Ontario reduced the lower rate of corporation income tax from 3.2% to 2.2% effective July 1, 2026. With the federal rate unchanged at 9%, an Ontario Canadian-controlled private corporation now pays a combined 11.2% on active business income within the small business limit, down from 12.2%. Two things follow that are not in the headline. A fiscal year that straddles July 1, 2026 is prorated between the two rates, so most corporations see roughly half the saving in the first year. And Ontario is separately reducing the dividend tax credit on small business dividends for 2027, which pushes personal tax on the money coming out in the opposite direction.
Both changes are confirmed at source. Ontario's own corporate income tax page sets the lower rate at 2.2% from July 1, 2026, having been 3.2% since January 2020. CRA's what's new for corporations carries the same change. The credit change is on Ontario's dividend tax credit page.
What actually changed
| Item | Before | After | Effective |
|---|---|---|---|
| Ontario lower rate | 3.2% | 2.2% | July 1, 2026 |
| Federal small business rate | 9% | 9% | unchanged |
| Combined rate within the limit | 12.2% | 11.2% | July 1, 2026 |
| Ontario general corporate rate | 11.5% | 11.5% | unchanged |
| Federal business limit | $500,000 | $500,000 | unchanged |
| Ontario credit, other Canadian dividends | 2.9863% | 1.9863% | 2027 |
| Ontario credit, eligible dividends | 10.0% | 10.0% | unchanged |
On a full $500,000 of active business income inside the limit, one percentage point is $5,000 a year of corporate tax. That is the number worth planning around, once you are actually in a year that gets it.
Straddle years are prorated, and most corporations have one
The rate changed mid-year, so unless your fiscal year end is June 30 your taxation year is split. The Ontario rate for the year is the day-weighted average of 3.2% and 2.2% across the days falling before and after July 1, 2026.
Three common year ends, each on $500,000 of active business income within the limit:
| Year end | Days at 3.2% | Days at 2.2% | Effective Ontario rate | Ontario tax | Saved against 3.2% |
|---|---|---|---|---|---|
| September 30, 2026 | 273 | 92 | 2.948% | $14,740 | $1,260 |
| December 31, 2026 | 181 | 184 | 2.696% | $13,479 | $2,521 |
| March 31, 2027 | 91 | 274 | 2.449% | $12,247 | $3,753 |
A December year end gets $2,521 in 2026 rather than $5,000, and a combined federal and Ontario rate of 11.696% rather than 11.2%. Only a fiscal year beginning on or after July 1, 2026 runs the whole year at 2.2%. The business limit itself is not prorated by the rate change, though it is still reduced for short taxation years and shared among associated corporations in the usual way.
If your instalments were set against last year's tax, this does not change them by much, and overpaying instalments to chase a $2,500 rate saving is a poor trade against the cash. The figures we keep current for planning of this kind sit on our 2026 rates page.
The credit going the other way
The Ontario dividend tax credit on other than eligible dividends, which is the category ordinary small business dividends fall into, drops from 2.9863% to 1.9863% for 2027. Eligible dividends are untouched at 10.0%.
That is deliberate rather than accidental. The dividend tax credit exists to approximate the corporate tax already paid on the underlying income. When the corporate rate falls, less corporate tax has been paid, so the credit is trimmed to keep the integration arithmetic roughly in line. The system is doing what it is designed to do. The consequence for an owner-manager is that the saving lands in the corporation and part of the cost lands on the personal return, six months apart.
The credit is expressed as a percentage of the taxable amount of dividends, the grossed-up figure that goes onto the return rather than the cash you actually received. So a one point reduction costs roughly $1,000 of Ontario credit for every $100,000 of taxable dividends reported. Scale that against a corporation distributing most of a $500,000 year and the personal cost is in the same order of magnitude as the $5,000 the corporation saves.
We are not going to publish a single combined 2027 figure for this. The corporate change and the credit change take effect on different dates, the credit applies by taxation year, and the result depends on your other income, your bracket, and where Ontario's surtax lands on you. That is calculator work rather than a rate you can look up, which is what our salary versus dividends calculator is for.
Who should actually recheck their mix
Roughly in order of how much it matters:
- Owners taking most of their compensation as non-eligible dividends. You collect the smaller corporate bill and the larger personal one. This is the group the change is aimed at
- Anyone planning a large distribution around the end of 2026. The credit reduction applies for 2027, so a dividend paid in December against one paid in January is a live arithmetic question, though the answer turns on your personal income in each of those two years and on whether the corporation has the cash
- Corporations earning close to $500,000. The gap between the 11.2% small business rate and Ontario's 11.5% general rate has narrowed, which changes how much effort is worth spending to keep income inside the limit
- Anyone who set a salary and dividend mix more than two years ago
Less affected: owners paid mostly by salary, owners retaining earnings in the corporation for equipment or working capital, and businesses well below the limit where the absolute dollars are small either way.
What has not moved
Worth stating plainly, because rate changes tend to generate advice that overreaches.
The federal rate on active business income within the limit is still 9% and the limit is still $500,000. Ontario's general rate is still 11.5%, so the small business deduction is still worth protecting. Passive investment income still grinds the business limit down on the same terms as before. And the reasons to take salary that have nothing to do with rates still stand: RRSP contribution room, CPP contributions, an income a lender will recognise on a mortgage application, and the ability to pay into a child care or disability credit that requires earned income. Those arguments were never rate arguments, so a one point move does not touch them. We work through the whole comparison in salary versus dividends.
What to do with this before your year end
If your fiscal year straddles July 1, 2026, make sure whoever prepares the T2 applies the day weighting rather than a single rate, because a full-year 2.2% claim on a December year end overstates the deduction and a full-year 3.2% understates it. Both come back.
If you are deciding on a bonus or dividend for a year ending in late 2026, run the two years side by side rather than assuming December beats January. A dividend accelerated into 2026 to catch the higher credit still has to fit inside your 2026 personal brackets, and pushing yourself up a bracket to save a credit point is a net loss. That comparison, done on your own numbers rather than on the direction of travel, is ordinary corporate tax planning work and it takes an afternoon.
All of our corporate and personal tax work
General information only, current at August 2026. Tax rules change and GST/HST status is fact-specific. Confirm your own position before relying on anything here.