When it comes to Ontario’s cut to the small-business corporate income tax rate, the effects of tax integration may require planning considerations in 2026 and beyond.
The Ontario budget this week lowered the small-business corporate income tax rate to 2.2% from 3.2% — a 30% drop — effective July 1, 2026. Given the provincial government’s introduction of a budget bill on Thursday, the measure is considered substantively enacted for financial reporting purposes.
The rate reduction will be prorated for taxation years straddling July 1, the budget said. From a calendar year-end perspective, the combined federal rate and Ontario small-business corporate tax rate decreases to 11.7% for 2026 (from 12.2%), and to 11.2% for 2027, as shown in an EY tax alert.
However, in line with the change, Ontario’s small-business (non-eligible) dividend tax credit rate will decrease to 1.99% from 2.99%, effective Jan. 1, 2027. As a result, the top marginal personal income tax rate for non-eligible dividends will increase to 48.89% next year, from 47.74% currently.
“From an integration perspective, this results in a higher overall tax burden on investment income earned through a corporate structure,” Henry Shew, head of tax with Our Family Office in Toronto, wrote in a LinkedIn post on Friday. “Previously, in Ontario, the combined corporate and personal tax on such income was approximately 57.93%, representing about a 4.4% cost compared to earning the income personally. Under the proposed changes, this combined rate increases to approximately 58.86%, widening the gap to about 5.33%.”
The increased personal tax rates on non-eligible dividends “makes it more expensive for business owners to access retained earnings, which could reduce the net benefit of the corporate tax cut,” Ryan Minor, director of tax with CPA Canada in Sudbury, Ont., said in a statement. “Business owners will need to weigh the advantages of lower corporate taxes against higher personal taxes when planning dividend withdrawals and long-term growth strategies.”
In his LinkedIn post, Shew wrote that given the dividend tax credit change takes effect on Jan. 1, 2027, “there may be planning opportunities to consider accelerating the payment of non-eligible dividends in 2026, where appropriate.”
That consideration aside, Thursday’s tax cut for Ontario small businesses will help free up after-tax income to reinvest and grow. The budget projected up to $5,000 in annual tax relief for businesses.
Industry groups lauded the measure on Thursday after the budget was released.
“Our members were hoping this budget would feature a new line item they could call their own, and the Ontario government delivered,” the Canadian Federation of Independent Business said in a release. “Lower taxes will help small businesses thrive, not just survive, as economic uncertainty continues with U.S. tariffs and other global pressures like high oil prices increasing the cost of doing business.”
Harmonizing with federal measures, the Ontario budget also included the renewal and enhancement of accelerated write-off measures for the cost of equipment and other assets, projected to provide more than $3.5 billion in Ontario income tax relief over four years to qualifying businesses.
Overall, the Ontario budget gave businesses “welcome breathing room and support to invest, diversify, compete and grow,” Daniel Tisch, president and CEO of the Ontario Chamber of Commerce, said in a release.
The chamber continues to call for additional supportive measures, including a simplified tax system and reduced regulation.
In other tax-related news, Bill C-15 received royal assent on Thursday. The legislation includes many measures, either from the latest federal budget or earlier. A big one for estate planning is the loss carryback extension for graduated rate estates.