The Ontario budget in March was received as a tax cut for small business, and it was one. The province dropped the small business corporate income tax rate from 3.2% to 2.2% on July 1, 2026, which brings the combined rate on the first $500,000 of active business income to 11.2%. The part fewer owners noticed came a few lines later: the money now taxed less inside the corporation is taxed more on the way out.
It is not a hidden penalty but exactly how Canadian tax integration is designed to work — the dividend tax credit exists to give the shareholder credit for the corporate tax already paid, and when the corporation pays less, the credit shrinks. The province built a six-month gap between the two changes, and that gap is the planning window. It closes on December 31.
What changes, in numbers
| 2026 | From January 1, 2027 | |
|---|---|---|
| Ontario small business corporate rate | 3.2% to June 30, then 2.2% | 2.2% |
| Combined federal-Ontario small business rate | 12.2% to June 30, then 11.2% | 11.2% |
| Ontario non-eligible dividend tax credit | 2.9863% | 1.9863% |
| Top combined rate on non-eligible dividends | 47.74% | 48.89% |
Sources: the 2026 Ontario budget tax highlights from PwC and Crowe's budget summary. Corporations with a year that straddles July 1 get a prorated rate for 2026.
The 1.15-point increase at the top bracket is the whole story for a high-income shareholder: $100,000 of non-eligible dividends costs roughly $47,740 in tax if received in 2026 and $48,890 if received in 2027. The difference is smaller in lower brackets, and it does not apply to eligible dividends paid out of income taxed at the general rate.
Declared is not paid
The trap is the date. A shareholder includes a dividend in income in the year it is received. A directors' resolution on December 15 declaring a dividend "payable January 10" produces a 2027 dividend taxed at the 2027 rate. If the point is to beat the credit change, the money has to move — by cheque delivered, transfer completed, or, where the corporation genuinely cannot spare the cash, a properly documented credit to the shareholder's account that the shareholder can draw on. Your accountant will have a view on which method they will defend, and the paperwork should match what actually happened.
Three corporate-law checks before the money moves
Tax gets the attention in December. The corporate law is where a rushed dividend goes wrong.
1. The solvency test. Under section 38(3) of Ontario's Business Corporations Act, a corporation cannot declare or pay a dividend if there are reasonable grounds for believing it is, or would after the payment be, unable to pay its liabilities as they become due, or that the realizable value of its assets would be less than its liabilities plus stated capital. Directors who vote for a dividend that fails the test are jointly and severally liable to restore the money to the corporation. A December dividend that strips the cash needed for January payroll and HST is exactly the case the section was written for — and it is one of the less obvious routes to personal liability for corporate debts.
2. The share terms. A dividend has to be paid on a class of shares whose terms allow it. If the plan is to pay different amounts to different family members, the articles need discretionary dividend classes, and the resolution has to declare on the right class. If you pay a spouse or adult child, the tax on split income rules also come into play, and they can push the dividend to the top rate regardless of the shareholder's bracket. That is a tax question, but the answer depends on how the shares were set up at incorporation.
3. The other shareholders. In a corporation with more than one owner, a shareholders' agreement often limits dividends, requires unanimous approval, or ties distributions to a cash reserve. A dividend that suits the majority's tax bracket and ignores the agreement invites the kind of dispute discussed in minority shareholder, no dividends, no way out.
When not to accelerate
Pulling a dividend forward is only worth doing for money you would have taken out in 2027 anyway. Leaving after-tax income in the corporation at 11.2% and paying it out years from now, or never, may still beat both rates. A shareholder in a lower bracket next year, or one planning a salary instead to create RRSP room, may come out ahead by waiting. A corporation holding investments has refundable tax to consider. None of that is decided by a legal rule, and I would not move money in December without your accountant's numbers in hand.
What a lawyer adds is the paper: a resolution that declares the right amount on the right class, a solvency analysis the directors can point to, and minute-book records that match what was paid and when. I prepare those as a fixed-fee year-end package, and if your minute book has gaps, December is a good time to find them — before Ontario's beneficial ownership registry starts asking for your ownership records.
Tax and rule changes like this one are tracked monthly in Money for Business. For the broader question of whether incorporating still makes sense at the new rates, see incorporate or stay a sole proprietor.
Ontario gave owner-managers six months' notice of a tax increase. Most of them will spend it on the tax cut.
Common questions
When does Ontario's dividend tax credit change?
The Ontario dividend tax credit rate on non-eligible dividends falls from 2.9863% to 1.9863% of the grossed-up dividend on January 1, 2027. It was announced in the March 26, 2026 Ontario budget to match the cut in the small business corporate tax rate.
How much more tax will I pay on dividends in 2027?
At the top bracket, the combined federal-Ontario rate on non-eligible dividends rises from 47.74% to 48.89%, about $1,150 more on every $100,000 of dividends. The increase is smaller in lower brackets.
Does the change affect eligible dividends?
No. The change applies to non-eligible dividends, which are generally paid from income taxed at the small business rate. Eligible dividends, paid from income taxed at the general corporate rate, are not affected by this measure.
If I declare a dividend in December 2026 but pay it in January, which year is it taxed in?
The year it is received. A dividend declared in December but paid in January 2027 is a 2027 dividend for the shareholder and is taxed at the 2027 rate.
What is Ontario's small business tax rate now?
2.2% from July 1, 2026, down from 3.2%. Combined with the federal 9% rate, active business income eligible for the small business deduction is taxed at 11.2% on the first $500,000. The rate is prorated for taxation years that straddle July 1, 2026.
Can directors be personally liable for paying a dividend?
Yes. Under the Ontario Business Corporations Act, a corporation cannot declare or pay a dividend if there are reasonable grounds to believe it would be unable to pay its liabilities as they come due, or that its assets would be worth less than its liabilities plus stated capital. Directors who vote for a dividend that fails this test are jointly and severally liable to repay it to the corporation.
Should every owner-manager pay a dividend before the end of 2026?
No. Accelerating only makes sense for money you would take out in 2027 anyway. Leaving income in the corporation, expecting a lower bracket next year, or needing salary for RRSP room can all point the other way. Your accountant should run the numbers for your situation first.
What paperwork does a year-end dividend need?
A directors' resolution declaring the dividend on a specific class of shares, a record that the solvency test was considered, confirmation that the shareholders' agreement permits it, and proof of payment that matches the resolution. All of it belongs in the minute book.