Bill 12 amends the Taxation Act, 2007 to increase two core parameters of Ontario’s provincial tax relief for small corporations. The bill raises the small business deduction rate applied by Ontario from 8.3% to 9.9% and increases the business limit used to determine eligibility from $500,000 to $600,000.
The changes take effect on January 1, 2026 (or are deemed to apply from that date if Royal Assent comes later). For practitioners and small corporate taxpayers, the bill alters both the marginal tax relief available and the surtax computation tied to the business limit; for the province it reduces revenues relative to the current law and requires administrative updates to filing and calculation rules.
At a Glance
What It Does
The bill increases Ontario’s small business deduction rate to 9.9% and raises the eligible business limit to $600,000; it also updates the surtax formula to reflect the new $600,000 threshold. The rate change is phased into tax years that straddle January 1, 2026 using a day-count ratio.
Who It Affects
Ontario resident Canadian-controlled private corporations (CCPCs) and other corporations claiming the provincial small business deduction, tax preparers, payroll and tax software vendors, and the Ontario Ministry of Finance (which must update guidance and revenue projections).
Why It Matters
Raising both the rate and the limit increases tax relief for many small firms and shifts the income range where lower provincial tax applies, affecting investment and hiring decisions for businesses near the old $500K cutoff and changing surtax calculations that rely on that threshold.
More articles like this one.
A weekly email with all the latest developments on this topic.
What This Bill Actually Does
The bill focuses on two technical but important components of Ontario’s provincial small business tax relief. First, it increases the percentage Ontario applies when calculating the provincially indexed small business deduction, moving from 8.3% to 9.9%.
Second, it raises the statutory business limit used to gate eligibility for the small business deduction from $500,000 to $600,000. Together those changes expand the amount of active business income eligible for preferential provincial tax treatment and increase the per-dollar benefit for income already under the limit.
A transitional rule in the amended subsection creates a day-weighted split for taxation years that straddle January 1, 2026: income is pro-rated so part of the year uses the 8.3% rate and part uses 9.9%, based on the number of days before and after the effective date. The surtax computation in clause 32(1)(b) — the formula that affects the surtax an Ontario small business adds — is updated simply by replacing each reference to $500,000 with $600,000, which changes the surtax breakpoints and percentages that apply to corporations near that cutoff.Practically, affected corporations will see lower Ontario tax liabilities as more active business income qualifies for the small business deduction and the per-dollar provincial relief increases.
Tax preparers must adjust worksheets and software to apply the new limit and the pro-rated rate for split taxation years. On the public finance side, these changes reduce provincial tax receipts compared with current law and will factor into Ontario’s fiscal planning beginning in the 2026 tax year.Because the bill is narrow and mechanical, it does not alter federal small business rules, nor does it change the tests for being a CCPC or the treatment of passive investment income; however, moving the provincial limit affects after-tax returns for businesses that coordinate provincial and federal planning.
The deemed-commencement clause means the amendments apply to the whole of 2026 even if Royal Assent comes after January 1, 2026.
The Five Things You Need to Know
The bill raises Ontario’s small business deduction rate from 8.3% to 9.9% for tax years (or portions of tax years) after December 31, 2025.
It increases the business limit used to determine small business deduction eligibility from $500,000 to $600,000 throughout the Taxation Act, 2007.
For taxation years that overlap the Jan. 1, 2026 effective date, the bill requires a day-count pro-rating so the old and new rates apply to portions of the year.
Clause 32(1)(b) — the surtax formula that uses the business limit in its calculation — is amended by replacing every $500,000 reference with $600,000, shifting surtax breakpoints.
The amendments are set to come into force on January 1, 2026, and are deemed to have come into force on that date even if Royal Assent occurs later.
Section-by-Section Breakdown
Every bill we cover gets an analysis of its key sections.
Pro-rated transition to the new rate in subsection 31(4)
This provision rewrites subsection 31(4) to create two multiplicative rate factors: one applying 8.3% to days in a taxation year that fall before Jan. 1, 2026, and one applying 9.9% to days after Dec. 31, 2025. The mechanical effect is a day-count formula that prorates the provincial small business deduction rate for fiscal years crossing the effective date. Practically, corporations with fiscal years that span the turn of 2025–26 must split their calculation and apply both rates pro rata, which will require updated worksheets and software logic.
Increase of the business limit to $600,000
These subsections change the statutory figure used to define the business limit from $500,000 to $600,000 — both in the main text of subsection 31(5) and in clause 31(5.1)(a). That single-number change expands the range of taxable active business income eligible for the preferential small business deduction and alters any tests, phase-outs, or interactions that reference the business limit.
Update of surtax formula references in clause 32(1)(b)
Section 2 amends clause 32(1)(b) by substituting $600,000 wherever $500,000 appears. Because the surtax added by an Ontario small business is computed using this clause, the amendment moves the surtax thresholds upward in lockstep with the raised business limit. For filers near the previous surtax breakpoints, the change may eliminate or reduce surtax exposure; for revenue estimators, it shifts projected surtax receipts downward.
Commencement — deemed effective date
The bill comes into force on January 1, 2026, and contains a deemed-commencement clause so the amendments apply as of that date even if Royal Assent is delivered later. This ensures the pro-rata rule and the new threshold govern the entire 2026 tax year. Administratively, the deemed-commencement reduces uncertainty for taxpayers and preparers but concentrates the need for immediate guidance from the Ministry of Finance and updates to tax-preparation systems ahead of 2026 filings.
Short title
Provides the bill’s short title — the Cutting Taxes on Small Businesses Act, 2025 — which is purely formal but important for citations in Ministry guidance, notices, and legislative references.
This bill is one of many.
Codify tracks hundreds of bills on this topic across all five countries.
Explore this topic in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Ontario resident CCPCs with active business income below or near $600,000 — they receive larger provincial small business deductions and lower marginal provincial tax on eligible income.
- Small businesses whose taxable income previously fell between $500,000 and $600,000 — these firms now qualify (or qualify for a larger deduction) and avoid higher provincial tax and surtax exposure.
- Owners and reinvesting entrepreneurs — higher after-tax returns on retained earnings or reinvested profits in the eligible range improve cash flow for operations and growth.
- Tax preparers and accounting firms — while not a direct beneficiary of policy, they gain new advisory opportunities helping clients re-evaluate tax planning and software configuration for the higher limit and pro-rated year calculations.
Who Bears the Cost
- Province of Ontario — lower corporate tax revenue from the small business deduction and reduced surtax receipts will widen budget pressures or require offsets elsewhere.
- Ontario Ministry of Finance and tax administration — they must draft updated rules, guidance, and forms and support a wave of taxpayer inquiries, all of which carry administrative costs.
- Tax compliance software vendors and in-house tax teams — these groups must update calculation engines to handle the new $600,000 limit and the day-count pro-rating for split years, incurring development and testing costs.
- Taxpayers near the threshold may bear planning costs — firms close to the new limit may undertake additional structuring or professional advice to optimize tax outcomes, increasing advisory fees.
Key Issues
The Core Tension
The central dilemma is straightforward: the bill lowers taxes for small businesses to support growth and liquidity, but doing so reduces provincial revenue and introduces opportunities for tax planning and distortions; policymakers must weigh the immediate benefits to small firms against budgetary trade-offs and potential shifts in taxpayer behaviour that the narrow mechanical changes do not address.
The bill is narrowly targeted and mechanically straightforward, but its practical effects depend on interactions with other tax rules. Increasing the provincial deduction rate and the business limit reduces provincial revenue; how Ontario offsets that loss (spending cuts, other tax changes, or borrowing) is outside the bill but matters for the policy’s net effect.
The pro-rated approach for split taxation years avoids a hard cliff for fiscal-year filers but complicates computations: software and preparers must implement day-count logic and ensure consistency with federal filings and any provincial guidance on rounding, fractional-day treatment, and related carryforwards.
Another unresolved implementation question is behavioral: larger after-tax returns for small CCPCs may encourage income retention in corporations rather than salary or dividends, and the move could interact with federal anti-avoidance measures or provincial rules on passive investment income. The bill changes surtax breakpoints by simple substitution of the new limit, but does not rework surtax rates or phase-out mechanics, which could leave odd marginal effective tax rate profiles for firms moving through the newly adjusted thresholds.
Finally, because the amendment is provincial-only, corporations that coordinate cross-jurisdiction planning (federal-provincial, multi-provincial) will need to revisit integration calculations to reassess effective combined rates.
There's more to this law than the bill.
Codify Laws traces every connection across the legislative lifecycle.