Ontario corporate tax for small business, explained
Incorporated Ontario businesses pay combined federal and Ontario corporate tax, with a lower rate on small-business income.
An incorporated Ontario business pays corporate income tax to both the federal government and Ontario, filed together through the T2. Active small-business income up to a limit is taxed at a reduced combined rate thanks to the small business deduction.
The small business deduction
Canadian-controlled private corporations get a lower tax rate on the first $500,000 of active business income each year. Income above that limit is taxed at the general rate, and passive investment income is taxed differently again — the 2026 numbers are below.
Why current books matter
Your corporate tax is only as accurate as your bookkeeping. Current books mean the right income, the right deductions, and no surprises at filing. Confirm the current rates and limits with your accountant, since they change.
The 2026 rates, in one table
An incorporated Ontario business pays two layers of corporate income tax — federal and provincial — filed together on one T2. What you actually pay depends on whether the income qualifies for the small business deduction:
| Type of income | Federal | Ontario | Combined |
|---|---|---|---|
| Active business income up to $500,000 (small business deduction) | 9% | 3.2% | 12.2% |
| Active business income above $500,000 (general rate) | 15% | 11.5% | 26.5% |
| Investment income (passive) | Higher rate, partly refundable when dividends are paid | Provincial rate applies | Materially higher than active income |
Figures are the published 2026 amounts, verified August 2026. Federal and Ontario thresholds change annually — confirm the current year before relying on them.
The grind that surprises profitable corporations
The $500,000 small business limit is not guaranteed. It is reduced when a corporation earns significant passive investment income: the limit generally starts grinding down once associated passive investment income passes $50,000 in a year and can be eliminated entirely as it climbs. A separate reduction applies based on the size of the corporation’s taxable capital.
Practically, this means a corporation that has been retaining profits and investing them can lose access to the low rate on its operating income without any change to the operating business itself. It is one of the strongest arguments for planning distributions and investments together, from books that are current, rather than discovering the interaction at year-end. The salary-versus-dividends decision is part of the same calculation.
This is general information, not tax advice for your situation. Get started and a Canadian accountant will give you the answer for your business.
Common questions
What's the small-business corporate tax rate in Ontario?
Canadian-controlled private corporations pay a reduced combined federal-provincial rate on active business income up to the annual limit. Confirm the current figure with your accountant, as it changes.
Is corporate tax filed separately for Ontario and Canada?
No. The federal and Ontario corporate returns are handled together through the T2.
What is the corporate tax rate for a small business in Ontario for 2026?
Active business income up to $500,000 is generally taxed at a combined 12.2% — 9% federal plus 3.2% Ontario — under the small business deduction. Income above that limit is taxed at the general combined rate of 26.5% (15% federal plus 11.5% Ontario). Investment income is taxed at materially higher rates, with part of the federal tax refundable when dividends are paid out.
Can my corporation lose the small business rate?
Yes. The $500,000 limit is reduced where a corporation and its associated companies earn significant passive investment income — generally starting once that income passes $50,000 in a year — and a separate reduction applies based on taxable capital. A profitable corporation that has been investing retained earnings can therefore lose the low rate on its operating income, which is why investment and distribution decisions belong in the same conversation.