Ontario Corporate Tax Rates

How Ontario corporate tax works

Ontario corporate income tax is levied under the Taxation Act, 2007 (Ontario) on the taxable income of corporations with a permanent establishment in the province. Since 2009, Ontario corporate tax has been administered by the Canada Revenue Agency alongside federal tax on a single T2 return, using Schedule 5 to allocate taxable income among provinces and report the Ontario tax, with Schedule 500 as the worksheet for the Ontario calculation. Ontario applies three basic rates: a small business rate on income eligible for the Small Business Deduction, a general rate on other active business income and investment income, and a reduced manufacturing and processing rate.

Ontario rates for 2026

The small business rate fell from 3.2% to 2.2% on July 1, 2026. The cut was announced in the March 2026 Ontario Budget and enacted by the Budget Measures Act, which received Royal Assent on April 24, 2026. The general and M&P rates did not change.

Notes on the rates:

• The Ontario small business rate is the 11.5% general rate less the Ontario small business deduction, which is 8.3% of eligible income for days before July 1, 2026 and 9.3% for days after June 30, 2026.
• The M&P rate comes from a separate Ontario tax credit for manufacturing and processing, which also covers farming, fishing, logging and mining profits. It is claimed on Schedule 502, using the Canadian M&P profits worked out on Schedule 27. It is not simply claimed at 10%.
• Ontario has no refundable tax on investment income of its own. The 10 2/3% additional refundable tax is federal (ITA s. 123.3), which is why the federal figure on investment income is 38.67% (38% less the 10% abatement, plus 10 2/3%). Part of it comes back through Refundable Dividend Tax On Hand (RDTOH) when the corporation pays taxable dividends.
• Personal services business income gets neither the small business deduction nor the federal general rate reduction, and carries a further 5% federal tax (ITA s. 123.5), for a federal rate of 33%.

Tax years that straddle July 1, 2026

A corporation whose tax year includes July 1, 2026 does not pick one rate. The Taxation Act, 2007, s. 31(4), weights the two deduction rates by days:

A tax year that begins on or after July 1, 2026 uses 2.2% on every day.

Who gets the Ontario small business rate

The Ontario small business deduction reduces the provincial rate on the first $500,000 of active business income earned by a Canadian-controlled private corporation (CCPC) with a permanent establishment in Ontario. It parallels the federal deduction under section 125 of the Income Tax Act (Canada), with one important difference on passive income.

• One limit, not two. The Ontario business limit is $500,000, matching the federal limit. The two are not additive; the same pool of income is eligible for both.
• Active business income only. The deduction covers income from an active business carried on in Canada. Investment income, specified investment business income, and income from a personal services business are excluded.
• Shared with associated corporations. The limit is shared among all associated corporations under the ITA section 256 tests, allocated on Schedule 23. See Associated Corporations Rule. If a corporation assigns part of its federal business limit to another corporation, its Ontario limit falls by the same amount.
• Taxable capital grind: Ontario follows it. The limit starts to shrink when the associated group's taxable capital employed in Canada in the previous year passes $10 million and reaches zero at $50 million (for tax years beginning on or after April 7, 2022).
• Passive income grind: Ontario does not follow it. Federally, the business limit falls by $5 for every $1 of adjusted aggregate investment income above $50,000, and disappears at $150,000 (ITA s. 125(5.1)). Ontario does not parallel that reduction. An otherwise eligible Ontario CCPC can retain its Ontario business limit even when the federal passive-income reduction raises the federal rate on the same active business income to 15%. The provincial taxable-capital, association and other eligibility conditions still apply.

Worked examples

A Toronto CCPC with a December 31 year end. It earns $700,000 of qualifying active business income in a full 2026 tax year, all allocated to Ontario. Assume sufficient taxable income, the full $500,000 federal and Ontario business limits, and no other deductions or credits. The first $500,000 is eligible for the small business deduction at the blended calendar-2026 rate; the remaining $200,000 is taxed at general rates.

The corporation's combined effective tax rate is about 15.9% for 2026. For a tax year that starts on or after July 1, 2026, Ontario tax on the first $500,000 is $11,000, and the same $700,000 costs $109,000 in combined tax, about 15.6%.

A Mississauga CCPC whose year starts July 1, 2026. It earns $450,000 of active business income, has no associated corporations, $4 million in prior-year taxable capital, and $30,000 of prior-year adjusted aggregate investment income. Assume a full-length tax year, all active income allocated to Ontario, sufficient taxable income and no other limit reductions, so the full $500,000 limit is available. Ontario tax is $450,000 × 2.2% = $9,900 and federal tax at 9% is $40,500, a combined $50,400 at 11.2%. If the small business deduction were lost entirely, for example because an associated corporation had been allocated the whole limit, Ontario tax would rise to $51,750 (11.5%) and federal to $67,500 (15%), a combined $119,250 at 26.5%.

These figures tax only the active business income; tax on any investment income must be calculated separately. Now suppose instead that the associated group has $180,000 of adjusted aggregate investment income in the relevant prior year, with the operating corporation retaining the full Ontario allocation and no taxable-capital reduction. The federal business limit is gone, so federal tax is $67,500 at 15%. The Ontario limit is untouched, so Ontario tax stays $9,900 at 2.2%. Combined: $77,400, or 17.2%.

Common mistakes

• Applying the Ontario general rate of 11.5% to all income. Eligible CCPCs can use the small business rate on qualifying income within their available business limit, which can be less than $500,000.
• Using one Ontario small business rate for a tax year that includes July 1, 2026. The rate is 3.2% for the days before and 2.2% for the days after, weighted by days.
• Ignoring the associated corporations rule. Two or more corporations controlled by the same person or group must share the $500,000 limit on Schedule 23. If the group does not file the agreement within 30 days of CRA asking for it, CRA allocates the limit itself (ITA s. 125(4)).
• Treating the federal and Ontario limits as additive ($1 million). They are aligned at $500,000.
• Assuming the passive income grind removes the Ontario rate. Prior-year adjusted aggregate investment income of $180,000 for the associated group eliminates its federal business limit, but that passive-income reduction does not apply to the Ontario limit.
• Forgetting the taxable-capital phase-out, which Ontario does follow, between $10 million and $50 million of taxable capital.
• Claiming the small business rate on personal services business income. It is taxed at the federal PSB rate of 33% plus the Ontario general rate.
• Applying the M&P rate to activities that do not qualify. Qualifying Canadian manufacturing and processing profits are computed on Schedule 27 and the Ontario credit on Schedule 502, not simply claimed at 10%.

Related concepts

• Small Business Deduction
• Associated Corporations Rule
• CCPC Status
• Schedule 5. Provincial Tax Allocation
• Refundable Dividend Tax On Hand (RDTOH)
• Ontario Made Manufacturing Investment Tax Credit