What is the corporate tax rate for a small business in Ontario?

The rate that applies to most small business income

A Canadian-controlled private corporation earning active business income in Ontario benefits from two layered small business rates: a federal small business rate, currently 9%, and an Ontario small business rate, currently 3.2%, applied together to give a combined rate of roughly 12.2% on the first $500,000 of that income in a fiscal year. This combined rate is why incorporating and retaining profit inside a corporation can defer tax compared to earning the same income personally, since 12.2% is well below most owners’ personal marginal tax rates. The $500,000 threshold is the business limit tied to the small business deduction, and it is shared among a group of associated corporations rather than given fresh to each one.

What happens above $500,000

Active business income earned above the $500,000 business limit no longer qualifies for the small business rate and is instead taxed at the general corporate rate, which combines a federal rate with Ontario’s general rate to land at roughly 26.5% as at the time of writing. This is still well below most personal top marginal rates, which is part of why incorporation continues to make sense for many owners even once they have grown past the small business threshold, but it is a meaningfully higher rate than the 12.2% band below it.

Passive investment income is taxed very differently

Income the corporation earns from investments rather than from operating the business, such as interest, most rental income, and portfolio dividends, is taxed at a much higher combined rate inside the corporation, in the range of 50% as at the time of writing. Part of that tax is added to a notional pool called refundable dividend tax on hand (RDTOH), which the corporation gets back as a refund once it pays out taxable dividends to its shareholders. The mechanics of that refund are covered in how RDTOH works. Beyond the higher rate on the income itself, earning too much passive income also shrinks the small business deduction available on the corporation’s active income, which we explain in how passive investment income reduces the small business deduction.

Personal services business income is taxed at a penalty rate

A corporation classified as carrying on a personal services business, essentially an incorporated employee rather than a genuine independent business, does not get the small business rate at all and instead faces an additional federal tax on top of the general rate, pushing the federal component alone to roughly 33%, with Ontario’s general rate added on top. We cover how this classification arises, and how to avoid it, in what is a personal services business.

What this means in dollars for a typical Ontario small business

A corporation earning $200,000 of active business income, well under the $500,000 threshold, pays roughly $24,400 in combined federal and Ontario tax at the small business rate as at the time of writing, leaving about $175,600 for the corporation to reinvest, hold, or eventually pay out to its owner. Compare that to the same $200,000 earned personally by a sole proprietor in a higher tax bracket, and the gap between the corporate rate and personal marginal rates is exactly why deferring tax inside a corporation, and drawing money out gradually through salary or dividends, is one of the main reasons owners incorporate in the first place.

That deferral advantage narrows once the money actually leaves the corporation, since personal tax on salary or dividends still applies on top of what the corporation already paid, which is the integration principle discussed in salary or dividends from your corporation. The rate difference matters most for profit the corporation keeps and reinvests rather than profit drawn out right away.

Why the exact numbers deserve a yearly check

Federal and provincial small business thresholds, rates, and the passive income grind rules have changed more than once in recent years, and Ontario does not necessarily mirror every federal adjustment on the same timeline. Because of that, we treat these percentages as directional rather than something to plug into a filing without confirming the current figures for the specific fiscal year in question. This matters most when a corporation is close to the $500,000 threshold, close to an associated-group limit, or deciding how much cash to leave invested inside the company versus paid out.

Corporate rate is only half the picture

The corporate tax rate tells you what the corporation pays, not what the owner ultimately keeps once money is drawn out personally. A full picture of what a given level of business profit actually costs in tax has to account for both layers together: the corporate rate on the way in, and personal tax on salary or dividends on the way out. Looking at the corporate rate alone can make incorporation look more favourable than it actually is for an owner who plans to draw out most of the profit every year rather than leave it invested inside the company.

How we handle this

We confirm the current federal and Ontario rates against the CRA’s published tables at the start of every corporate engagement rather than relying on last year’s numbers, and we model where a client sits relative to the $500,000 threshold and the passive income grind before year-end, not after. This is part of our corporate tax services.

Source: CRA — Corporation tax rates.