Ontario's small business corporate income tax rate dropped from 3.2% to 2.2% on Canada Day, July 1, 2026, as part of the provincial government's 2026 budget passed in April. The reduced rate applies to the first $500,000 of active business income for the next three years, offering up to $5,000 in annual tax relief for more than 375,000 small businesses, according to Premier Doug Ford's Progressive Conservative government. The move is expected to generate $1.1 billion in total savings by 2029, building on a previous reduction from 3.5% to 3.2% in 2020.
Small business advocates welcome the cut
The Canadian Federation of Independent Business (CFIB) praised the tax reduction as a critical support for small enterprises facing economic headwinds. "This tax cut is a win for small businesses, people and the economy," said Angela Drennan, CFIB's Ontario vice-president of legislative affairs. The CFIB reported that over 50 pre-budget meetings were held at Queen's Park to advocate for the lower rate, and business owners signed petitions urging the change. Julie Kwiecinski, CFIB's Ontario director of provincial affairs, noted that "for the past 34 consecutive months, lack of demand has been rated by our Ontario members as the top barrier to their sales or growth," emphasizing that lower taxes would help firms "struggling with economic uncertainty, U.S. tariffs, ever-increasing costs of doing business and low demand."
Dividend tax credit reduction to offset gains
Despite the corporate tax cut, accounting experts warn that a reduction in the dividend tax credit effective January 1, 2027, will increase personal tax on non-eligible dividends, potentially offsetting some benefits. Ryan Minor, director of taxation at Chartered Professional Accountants Canada, explained that "this makes it more expensive for business owners to access retained earnings, which could offset some of the benefits of the corporate tax cut." Armando Iannuzzi, co-managing partner at Markham-based accounting firm KRP LLP, said the tax credit on dividends paid from after-tax corporate earnings will drop from 2.9863% to 1.9863%. He added that the combined corporate and personal tax on investment income will rise to about 58.86% from 57.93%, creating "potential disadvantages for some small to medium-sized business owners."
Direct tax cuts preferred over loans and grants
Joseph Falzata, an Ontario policy analyst for CFIB, said business owners preferred tax cuts over loans, programs, or grants due to unpredictable economic conditions. "A tax cut is a direct measure that doesn't involve doing extra paperwork, searching for programs that rule out most small applicants, hiring extra help with forms or paying interest — actions that stand in the way of small business success," Falzata said. The CFIB noted that small businesses indicated they would direct tax savings to growth initiatives such as increasing employee compensation, expanding operations, and hiring new employees.
