Ontario's 2026 Budget Cuts the Wrong Business Tax Rate, Experts Warn
In its 2026 budget announcement, the Ford government unveiled a significant reduction in Ontario's small-business tax rate as part of a multi-year "Tax Action Plan" aimed at improving the province's tax system. The rate will drop from 3.2 percent to 2.2 percent, a move intended to help smaller businesses stay afloat and encourage reinvestment for growth.
The Problem with Cutting the Small-Business Rate
While the government's focus on business taxes is appropriate, policy analysts argue that cutting the small-business rate is misguided. Ontario's tax system currently features two rates: the small-business rate applies to income up to $500,000, while the general business tax rate of 11.5 percent applies to all income above that threshold.
By reducing the small-business rate, the government is actually widening what experts call the "tax wall"—the significant jump in tax rates that businesses face when they grow beyond the small-business classification. Previously, this jump was 8.3 percentage points (from 3.2 percent to 11.5 percent). With the new changes, businesses will face a 9.3 percentage point increase (from 2.2 percent to 11.5 percent) once they exceed $500,000 in income.
How the Tax Wall Discourages Business Growth
Research indicates that this tax wall creates a powerful disincentive for businesses to reinvest earnings and expand beyond the $500,000 threshold. Many companies instead find ways to distribute additional funds to avoid the substantial tax increase that comes with growth.
This disincentive represents a significant drag on Ontario's economy because high-growth companies are responsible for much of the private-sector job creation in Canada. These businesses also drive innovation by disrupting existing industries and introducing new technologies and processes.
Ontario and Canada as a whole certainly need more high-growth businesses to drive economic development, and while the proposed tax cut provides some relief for smaller operations, it fails to address the fundamental barrier to expansion that the tax wall represents.
Alternative Approaches for Encouraging Business Growth
Policy experts suggest two alternative approaches that would more effectively encourage business expansion in Ontario:
- Reduce the General Business Tax Rate: Instead of cutting the small-business rate, the government should have reduced the province's 11.5 percent headline business-tax rate. This approach would lower the tax wall and encourage more small businesses to expand beyond the $500,000 income threshold. It would also make Ontario more attractive to larger-scale investments, such as new production facilities, aligning with the government's goal of attracting major projects in mining, energy, and other critical sectors.
- Implement a Single Flat-Rate Tax System: The government could replace the existing two-rate framework with a single, flat-rate tax on profits for all businesses regardless of size. This could be paired with an annual 100 percent write-off for earnings reinvested into the business. Such a system would eliminate the tax wall entirely and, when combined with increased write-offs, would provide a strong incentive for businesses to reinvest in their own growth, leading to greater overall job creation and prosperity for workers.
The Government's Missed Opportunity
The Ford government has established worthy goals to improve Ontario's tax system and create the best possible environment for businesses to expand and grow. Premier Doug Ford and Finance Minister Peter Bethenfalvy announced the 2026 budget at Toronto's Queens Park on March 26, emphasizing their commitment to supporting Ontario's business community.
However, in pursuing these goals, the government has ultimately cut the wrong business tax rate. While the reduction in the small-business rate may provide temporary relief for some operations, it fails to address the structural barriers that prevent businesses from growing beyond a certain size. The widened tax wall may actually discourage the very expansion the government claims to support.
As Ontario moves forward with its Tax Action Plan, policymakers should reconsider their approach to business taxation to ensure that the province's tax system truly encourages growth rather than inadvertently hindering it.
