Ontario's Small Business Tax Cut: What the Drop to 2.2% Actually Means

What changed on July 1

Ontario's 2026 budget cut the province's small business corporate income tax rate from 3.2% to 2.2%, effective July 1, 2026. The change applies to Canadian-controlled private corporations on their active business income, and it lands alongside a separate move that raised the small business limit from $500,000 to $600,000 — the ceiling of income eligible for the lower rate in the first place.

Because the effective date falls mid-year for many businesses, the province is prorating the cut for corporate taxation years that straddle July 1, 2026. In practice, that means a company with a fiscal year that doesn't line up neatly with the calendar will pay the old 3.2% rate on the portion of the year before July 1 and the new 2.2% rate on the portion after, rather than one rate applying to the whole year.

The combined number that matters

Ontario's rate doesn't exist in isolation — small businesses pay both a federal and a provincial small business rate on the same income. Combined with the federal small business rate, the total effective small business tax rate on qualifying active business income falls to 11.2%, down from 12.2%.

That one-percentage-point combined drop is the number incorporated small business owners in Ontario should actually be tracking, since it's the all-in rate that determines what's left after tax on eligible active business income.

Who this touches — and who it doesn't

This is specifically a corporate tax change. It applies to Canadian-controlled private corporations (CCPCs) on active business income, up to the business limit. The business limit increase to $600,000 means a larger slice of a corporation's income can now qualify for the lower small business rate before the general corporate rate kicks in on income above that threshold.

• The rate cut applies to active business income earned inside a CCPC, not to salary, dividends, or personal income an owner draws from the business.
• It does not apply to unincorporated sole proprietorships, which are taxed under the personal income tax system rather than the corporate small business rate.

The bottom line

For an Ontario small business owner, the mechanics are straightforward even if the dollar impact will vary company to company: less of a corporation's active business income up to $600,000 goes to tax, and more income now qualifies for that lower rate than did before the budget. The proration rule means the timing of a company's fiscal year — not just its total annual income — affects exactly how the transition plays out for this one straddling year.

This is general information about a tax policy change, not individualized advice. How the new rate, the higher business limit, and the proration rules interact with a specific company's fiscal year-end and income mix is a question for that business's own accountant or tax advisor.

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