If you own an incorporated business in Ontario, the 2026 provincial budget contains a change that deserves your attention, and in some cases, your action before the end of this calendar year.
On March 26, 2026, Ontario tabled its budget titled A Plan to Protect Ontario. The headline for small business owners was positive: the province is cutting the Ontario small business corporate income tax rate from 3.2% to 2.2%, effective July 1, 2026. For a corporation earning up to $500,000 in eligible active business income, that represents up to $5,000 in annual tax savings. That is real money, and it is worth acknowledging.
But buried in the same budget is a second change that works in the opposite direction, one that increases the personal tax cost of accessing the retained earnings already sitting inside your corporation.
What Is Actually Changing
Along with the corporate rate reduction, Ontario announced a reduction to the non-eligible dividend tax credit (DTC), dropping it from 2.9863% to 1.9863%, effective January 1, 2027.
What does that mean in practical terms? The top marginal personal income tax rate on non-eligible dividends in Ontario will increase from 47.74% to 48.89% starting next year.
Non-eligible dividends are the dividends paid out of income that was taxed at the small business rate, which is precisely the income most incorporated small business owners in Ontario are earning. In other words, the same income that benefits from a lower corporate rate today will cost more to extract personally after January 1, 2027.
Why These Two Changes Are Connected
Canada’s tax system is built on a principle called tax integration. The idea is that, in theory, the total tax paid on income should be roughly the same whether you earn it personally or through a corporation. When the corporate tax rate goes down, the dividend tax credit is adjusted downward on the personal side to maintain that balance.
The issue is timing. The corporate rate reduction takes effect July 1, 2026. The dividend tax credit reduction does not take effect until January 1, 2027. That gap creates a window, and it also creates a long-term shift in how much it costs to pull retained earnings out of your corporation as dividends.
As Ryan Minor, Director of Tax with CPA Canada, stated clearly when the budget was released: business owners will need to weigh the advantages of lower corporate taxes against higher personal taxes when planning dividend withdrawals and long-term growth strategies.
Who Needs to Pay Attention
This change is directly relevant to you if:
- You operate an incorporated business in Ontario that qualifies for the Small Business Deduction
- You pay yourself through non-eligible dividends, either in whole or in part
- You have accumulated retained earnings inside your corporation that you have not yet distributed
- You are an incorporated professional, contractor, consultant, or family business owner
If you pay yourself exclusively through salary, or if your corporation earns income taxed at the general corporate rate and pays eligible dividends, this particular change may have a different impact on your situation and is worth discussing with your advisor separately.
The 2026 Planning Consideration
Here is the key point for this year: the dividend tax credit reduction does not take effect until January 1, 2027. That means dividends paid before December 31, 2026 are still subject to the current, more favourable tax credit rate.
For some business owners, this may create a reason to review whether it makes sense to accelerate dividend distributions in 2026, before the higher personal tax rate takes effect. This is not a decision to make quickly or without context. Whether accelerating dividends is beneficial depends on your personal income level in 2026, your corporate cash flow needs, and your broader financial plan. In some cases, deferral may still be the better strategy.
What is clear is that doing nothing, and allowing 2026 to pass without reviewing your situation, is itself a decision, and not necessarily the right one.
What You Should Be Thinking About Now
If you are an incorporated business owner in Ontario, now is a practical time to:
Review your current retained earnings balance. If your corporation has accumulated income that was taxed at the small business rate, understand how much of it you ultimately intend to distribute and over what timeline.
Revisit your salary and dividend mix. With the personal tax cost of non-eligible dividends increasing in 2027, it may be worth reassessing how you structure your compensation going forward.
Consider the timing of distributions. If a dividend payment makes sense given your personal income and corporate needs, there may be an advantage to taking it in 2026 rather than waiting.
Think ahead to 2027 and beyond. The lower corporate rate is genuinely beneficial for businesses that are reinvesting profits and growing. The trade-off is that extracting that income personally will cost a little more. Long-term planning with a tax professional can help you find the right balance.
The Bigger Picture
The Ontario government’s 2026 budget reflects a deliberate balance: support small business growth through lower corporate taxes while maintaining the integrity of the tax system by adjusting the corresponding personal tax credit. Neither change exists in isolation, and the net effect on any individual business owner depends entirely on their specific situation.
What this budget makes clear is that incorporated business owners in Ontario need a coordinated, forward-looking tax strategy, not just a return filed once a year. The decisions you make about how and when to access retained earnings have real dollar consequences, and those consequences are changing in 2027.
How The TaxForce Can Help
At The TaxForce, we work with incorporated business owners across Ontario to build tax strategies that reflect how you actually earn and access income. Whether you are assessing your dividend strategy for 2026, revisiting your salary and dividend mix, or simply trying to understand how the Ontario budget affects your bottom line, our team is here to help you think it through clearly and practically.
If you have questions about what these changes mean for your specific situation, we would be glad to talk.
This article is intended for general informational purposes only and does not constitute tax or financial advice. Tax rules are subject to change and individual circumstances vary. Please consult a qualified tax professional for guidance specific to your situation.
Ready to review your strategy before the year-end window closes? Book a call with The TaxForce. We’d love to hear from you.
📞 226-776-1219 | thetaxforce.ca
Categories: Small BusinessSmall Business Month
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