Ontario's small business owners are set to receive a tax cut, with the provincial government reducing the small business corporate income tax rate from 3.2% to 2.2% on the first $500,000 of active income for the next three years. This change, which comes into effect on Wednesday, is expected to provide up to $5,000 in tax relief per year for over 375,000 small businesses. The government estimates that this tax cut will save businesses a total of $1.1 billion by 2029.
The tax reduction is part of the provincial government's 2026 budget, which was passed in April. This is not the first time the government has lowered the small business income tax rate, having previously reduced it from 3.5% to 3.2% in 2020. The Canadian Federation of Independent Business has expressed support for the tax cut, stating that it will help ease financial pressures on small businesses.
The Canadian Federation of Independent Business notes that small businesses have been facing significant challenges, including economic uncertainty, US tariffs, and increasing costs. According to the organization, lack of demand has been the top barrier to sales or growth for Ontario members for 34 consecutive months. The group believes that the tax cut will help businesses to invest in growth-stimulating measures, such as increasing employee compensation, expanding operations, and hiring new employees.
Many business owners prefer tax cuts over loans, programs, and grants, as they provide a direct measure of assistance without the need for extra paperwork or additional costs. A policy analyst notes that tax cuts can help small businesses to succeed by providing them with more resources to invest in their operations.
However, accounting agencies warn that the tax cut may be offset by higher dividend costs that will come into effect next year. The reduction in the dividend tax credit will result in higher personal tax rates for non-eligible dividends. This change could have a significant impact on corporations with investment income, potentially negating the benefits of the corporate tax cut.
Some experts point out that the combined corporate and personal tax on investment income will increase, resulting in a higher tax burden for businesses with investment income. While the tax hike is not significant on its own, it may create disadvantages for some small to medium-sized business owners when combined with passive income rules.
