The province of Quebec announced a cut to the small-business corporate income tax rate on Wednesday, presenting planning considerations for 2026 and beyond, given the effects of tax integration.
Quebec lowered the small-business corporate income tax rate to 2.2% from 3.2% — a 30% drop — effective for taxation years beginning after Wednesday, April 29.
That means the combined federal and Quebec small-business corporate tax rate decreases to 11.2%, from 12.2%, for taxation years beginning after April 29.
However, in line with the change, Quebec’s non-eligible dividend tax credit rate will decrease to 2.69% from 3.42%, effective Jan. 1, 2027. As a result, Quebec’s top marginal personal income tax rate on non-eligible dividends will increase to 49.54% next year, from 48.7% currently, as shown in a tax news flash from KPMG LLP.
From a tax integration perspective, the increased personal tax rates on non-eligible dividends make it more expensive for business owners to access retained earnings, which could reduce the net benefit of Wednesday’s corporate tax cut and require planning considerations related to dividend withdrawals and long-term growth.
Previously in Quebec, the combined corporate and personal tax on investment income was 58.7%, representing about a 5.4% tax cost compared to earning income personally. With the changes, “as of 2027, the combined tax rate on such income will rise … to 59.38%,” said Sébastien Desforges, senior tax manager with KPMG LLP (Canada) in Montreal, in a LinkedIn post on Wednesday. Desforges told Advisor.ca that he estimated the tax cost would increase to 6.1% in 2027.
For 2026, business owners may need to consider whether there are planning opportunities to accelerate the payment of non-eligible dividends, as appropriate. As noted in the KPMG news flash, with the changes announced on Wednesday, there is a tax advantage when Canadian-controlled private corporations in Quebec pay non-eligible dividends to Quebec resident individuals in 2026 versus 2027. “This is because of the timing mismatch between the decrease in the small-business corporate income tax rate to 2.20% for taxation years beginning after April 29, 2026, and the increase in the non-eligible dividend tax rate on January 1, 2027,” the KPMG news flash says.
A similar situation arose in Ontario, which earlier this year also cut its small-business corporate income tax rate, effective July 1, 2026.
The consideration of retained earnings aside, Wednesday’s tax cut for Quebec small businesses may help free up after-tax income to reinvest and grow. The provincial government said the tax cut represents nearly $630 million in tax relief over five years for 75,000 small and medium enterprises in the province, and each business owner could save up to $5,000 annually.
The tax cut “will make the province more attractive for businesses,” said Dany Provost, director of financial planning and tax optimization with SFL Expertise in Quebec, in an email.
Provost also noted that the combined corporate and personal tax rate on small business income would increase to 55.19% next year from 54.96% currently — an increase of 0.23%. “A $10,000 dividend … would result in approximately $23 more tax,” he said, which is “negligible.”
On Wednesday, Quebec also announced it will harmonize with several measures from Bill C-15, including changes to the trust reporting rules, amendments to alternative minimum tax, and the extended period for the loss carryback strategy.