One Big Number Just Changed on You: Ontario’s July Small Business Rate Cut

Most years, the corporate tax rate move a little and nobody notices. This year it moved enough to matter, and changed mid-year, which is the part that trips people up.

If you run a professional corporation in Ontario, here’s what actually changed, what it’s worth, and where the mechanics get messy.

THE SMALL BUSINESS RATE DROPPED TO 11.2%

Effective July 1, 2026, Ontario cut its small business corporate income tax rate from 3.2% to 2.2%. Combined with the unchanged federal rate of 9%, the all-in rate on active business income eligible for the small business deduction fell from 12.2% to 11.2%.

On paper this is straightforward: less tax on the same income, and more income now qualifies for the low rate. In practice, the July 1 effective date creates a proration problem for any corporation whose fiscal year doesn’t happen to end on June 30.

If your year-end is December 31. Your 2026 taxation year spans both rates. Roughly the first half of the year is taxed at 12.2%, the second half at 11.2%, blended into a single effective rate for the year — something close to 11.7%, depending on exactly how the days split. You don’t get the full 11.2% until your 2027 fiscal year.

If your year-end is June 30. You get the cleanest transition of any year-end — your current fiscal year closes right at the changeover, and your next one opens already at the new rate.

If your year-end falls somewhere else. You’re prorating too, just on a different split. The earlier your year-end falls in the calendar year, the longer you wait for the full benefit.

None of this is a reason to change your fiscal year-end on its own. It is a reason to know which rate you’re actually working with before you make a bonus, dividend, or year-end income-timing decision this year — the math is different depending on which side of July 1 the income lands on.

THE LIFETIME CAPITAL GAINS EXEMPTION IS $1,250,000

The LCGE on qualified small business corporation shares was increased to $1.25 million for dispositions on or after June 25, 2024, and indexation resumed this year.

Because only half of a capital gain is taxable, that shelters roughly $625,000 of taxable capital gain — worth real money on an eventual sale, and worth more the earlier your shares are structured to qualify.

The exemption doesn’t attach itself automatically. Your shares have to pass the qualified small business corporation tests at the time of sale — broadly, 90% of the corporation’s assets used in an active business at that moment, and 50% throughout the preceding 24 months. Passive investments sitting inside the corporation — the same investments a holding company is often used to manage — can quietly disqualify shares that would otherwise shelter over a million dollars. Because of the 24-month lookback, this is planning that has to happen well before a sale is on the table, not during one.

WHAT THIS MEANS FOR YOU RIGHT NOW

If you’re deciding on year-end compensation. The rate you’re taxed at on income retained in the corporation this year depends on your fiscal year-end and how the days fall relative to July 1. Don’t assume 11.2% applies to all of 2026 — for most year-ends, it doesn’t yet.

If a sale or exit is anywhere in your plans. The higher exemption is only worth something if your shares still qualify when you sell. If you haven’t had a QSBC health check in the last couple of years — especially if the corporation is holding meaningful investments — that’s worth doing now, not at the letter of intent stage.

If you have multiple shareholders or a family trust in the structure. The exemption is per individual. Multiplying it across shareholders is a real planning opportunity, and one that needs to be built well ahead of any transaction.

Neither change requires you to do anything immediately. Both are worth twenty minutes with your actual numbers rather than a general estimate, because the difference between “the rate dropped” and “the rate dropped for my year-end” is not the same number.

Related

• Tax Planning for Professional Corporations
• Do You Actually Need a Holding Company?
• Salary vs. Dividends: How to Decide