Tax cut for Ontario small businesses begins on Canada Day
· Toronto Sun
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Owners of small businesses throughout Ontario will pay less in taxes beginning Wednesday.
The provincial government passed its 2026 budget in April that will see the small business corporate income tax (CIT) rate drop from 3.2% to 2.2% for the next three years on the first $500,000 of active income.
Premier Doug Ford’s Progressive Conservative government said more than 375,000 Ontario small businesses could see up to $5,000 in tax relief every year, adding a total of $1.1 billion will be saved by 2029.
This lowered rate follows the past reduction of the small business income tax from 3.5% to 3.2% in 2020.
Helping ease financial pressures
The Canadian Federation of Independent Business (CFIB) said it supports the further tax drop for small businesses as it will help ease financial pressures.
“This tax cut is a win for small businesses, people and the economy,” Angela Drennan, CFIB’s Ontario vice-president of legislative affairs, said in a statement.
“Small businesses told us they would direct any tax savings to growth-stimulating measures, including increasing employee compensation, expanding their operations and hiring new employees.”
The CFIB, an association that advocates for small businesses, said more than 50 pre-budget meetings were held at Queen’s Park about the urgency to lower the tax rate.
The group also said business owners signed CFIB petitions asking for tax changes.
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“Lower taxes will also help small businesses struggling with economic uncertainty, U.S. tariffs, ever-increasing costs of doing business and low demand,” said Julie Kwiecinski, the CFIB’s Ontario director of provincial affairs.
“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. This means that people haven’t been buying enough of their goods and services to allow them to get ahead and stop treading water.”
Joseph Falzata, an Ontario policy analyst for the organization, said business owners preferred tax cuts over loans, programs and grants due to the shifting and unpredictable economic conditions, calling it a “direct measure” to assist small companies.
“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.
Tax cut offset by credit reduction
However, accounting agencies say the small business tax cut is being offset by higher dividend costs that kick in next year.
According to Ryan Minor, the director of taxation at Chartered Professional Accountants Canada, non-eligible dividends will see higher personal tax rates as the dividend tax credit is reduced.
“This makes it more expensive for business owners to access retained earnings, which could offset some of the benefits of the corporate tax cut,” Minor said in an analysis of the provincial budget .
Armando Iannuzzi, a co-managing partner at Markham-based accounting firm KRP LLP, echoed those financial challenges.
He said there wasn’t nearly as much attention paid to the budget reducing the tax credit on dividends paid out of after‐tax corporate earnings, which will be reduced from 2.9863% to 1.9863% effective Jan. 1, 2027.
“This tax increase could have a significant impact on corporations with investment income, effectively negating the CIT rate cut for those affected,” Iannuzzi said .
He also pointed out that the combined corporate and personal tax on investment income will increase to about 58.86% from 57.93%, which would boost the tax burden from income earned through a corporate structure.
“While not a major tax hike, per se, when combined with passive income rules, the dividend tax credit change will create potential disadvantages for some small to medium-sized business owners,” Iannuzzi said.