Episode 265: Ontario Corporate Tax Rate Drops to 11.2%—So Why Are Business Owners Worse Off?

Listen here on our website:

Or jump to this episode on your favourite platform:

Watch Now!

Is Ontario’s small business tax cut actually saving you money—or just shifting the tax bill somewhere else?

A lower corporate income tax rate sounds like a win for business owners, especially when headlines make the cut look dramatic. But if you eventually need to pull retained earnings out of your corporation, the personal tax side matters just as much as the corporate savings. This episode breaks down what the change really means, why the “savings” may not be as generous as they appear, and how business owners should think more strategically about salary, dividends, and retained earnings.

You’ll walk away with:

• A clearer understanding of how Ontario’s small business tax cut affects active corporate income.
• The round-trip math behind saving tax inside the corporation versus paying more when dividends come out personally.
• Key planning questions to consider around retained earnings, passive income, salary, dividends, and long-term tax efficiency.

Press play now to understand whether this tax change helps your business—or quietly creates a bigger planning problem down the road.

Resources:

• Ready to take a deep dive and learn how to generate personal tax free cash flow from your corporation? Enroll in our FREE masterclass here. 
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Discover which phase of wealth creation you are in. Take our quick assessment and you’ll receive a custom wealth-building pathway that matches your phase and learn our CRA compliant tax optimized strategies. Take that assessment here.
• Dig into our Ultimate Investment Book List
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX. 

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

For Canadian entrepreneurs, building a strong Canadian wealth plan starts with understanding how small business taxin Ontario, a corporate tax cut, dividend tax, and personal vs corporate tax planning can impact long-term decisions around tax planning, business strategy, and wealth management. Whether your goal is financial freedom Canada, financial independence Canada, or an early retirement strategy, the right approach may include corporate wealth planning, salary vs dividends Canada, RRSP optimization, optimizing RRSP room, tax-efficient investing, passive income planning, and smart corporation investment strategies. For business owners pursuing modest lifestyle wealth, legacy planning Canada, and building long-term wealth Canada, it’s important to align financial buckets, an investment bucket strategy, financial vision setting, retirement planning tools, and financial systems for entrepreneurs with practical Canadian tax strategies, business owner tax savings, capital gains strategy, and corporate structure optimization. From real estate investing Canada and real estate vs renting to financial diversification Canada, passive income, and estate planning Canada, the best wealth building strategies Canadahelp connect today’s cash flow decisions with tomorrow’s freedom, security, and family legacy.

Transcript:

Jon Orr: Ontario just announced a small business tax cut. You may or may not have heard the news around corporate tax cut here. Basically dropping the rate in here in Ontario from 3.2% to 2.2%. Now with that, really for us, when you think about our corporate tax rates, we’ve quoted here on the show many times that our corporate tax rate on the first $500,000 is 12.2%. And now with this reduction of 1% on the provincial side, this is really saying that our 12.2% is now going to be 11.2%, which sounds like a gift. It sounds like, hey, the government just lowered corporate tax rates for small businesses under $500,000 of net operating income. Sounds like a great deal for us. What we’re gonna be unpacking here is, is it?

Jon Orr: Is it really? And that’s what we really want to kind of get into the math here so that you walk away from today understanding the implications of what’s happened here when you see the headline that we’ve got a 1% reduction in corporate tax on say that first $500,000.

Kyle Pearce: I love it, I love it. And you know, one of these headlines I saw was like, they reduce Ontario cut small business tax rate by 31.25%, which is true. Going down from 3.2% to 2.2%, that’s like a big — and in school, you know, us being math teachers, that was like one of our lessons — the bias of using math to persuade people. It’s like, that’s such a huge reduction.

Kyle Pearce: And in reality, from an Ontario perspective, it is fact. It’s true. They are doing something to try to minimize that tax. Now, before our real estate investors who own property inside corporations or other investors out there get too excited, remember, real estate income is considered passive. So that’s not going to affect you in any positive way or any material way. You get the very high passive income tax rate. So here in Ontario, 50.17% is what you get to pay upfront until we do all kinds of rigmarole to get this money out as a dividend.

Kyle Pearce: Now in today’s episode, you might be in BC and you’re going, this doesn’t apply to me. Well, I’m gonna argue that this does apply to all Canadians because what we wanna chat about is what has to happen anyway when we earn money inside a corporate structure and some of the things that we want to at least understand so that we can sidestep some of the mines that have been left for us when we’re trying to build our income.

Kyle Pearce: So one thing I will say is that — is this helpful? Absolutely. It’s going to be helpful to small businesses, especially small businesses that require that additional cash flow from year to year. Let’s say you’re running a small business and that extra — let’s be real here — this 1% savings on $500,000 maximum, this is how much we can possibly save, up to $5,000 can be saved. That is money that can then go back into the business and do something else with it. Now you have to have profit for this to help — you’re not gonna get taxed if you have zero profit. But $5,000 is $5,000.

Kyle Pearce: Now, where this is really important for us to recognize though — the goal here is not to make business owners wealthy through passive income. It’s through active income and to build businesses and to try to make Ontario stronger. So all of these things are great, except if you are successful at doing this thing called business, because the challenge then is, what happens later when we take this money out? If it was just taking it out like we normally do, and we’ve got to deal with salary and dividends and all that fun stuff, that would be fine. But they did throw in a little gotcha in there.

Kyle Pearce: First of all, this cut is going to come in on July 1st — Canada Day of all times. July 1st, 2026 is when this is going to take effect. And there is going to be a change at a personal level come January 2027, and that is not reducing your personal tax but actually increasing your personal tax to get those same dollars out. So you saved an extra $5,000 in the corporation, but now you’re going to get fully taxed on all the money at about an extra percent on the way out.

Jon Orr: So the next question, even when you hear the numbers, is you’re still going to ask: okay, so you’re reducing my corporate tax by 1% on that first $500,000. There is an increase in personal tax on non-eligible dividends, so when I send that dividend money out to myself as a shareholder, I got to pay a little more. But now I’m still wondering — round trip, am I still in the black, or am I in the red? I think this is the confusing part we want to answer here today. Tax discount on one side, a little bit more tax on the other side — when I come out the other side, am I paying more tax overall or am I still saving tax?

Jon Orr: Because even if you hear a higher percentage on the personal side, you still have to wonder — if all that works out, is it still a net win? Because of all the monkeying around that happens between dividends and paying yourself and personal tax and whatever rate I’m in. So we did the math. We want to unpack it here with you.

Kyle Pearce: Yeah, absolutely. The easy math says, hey, we’re going to get to keep an extra $5,000 in the corporation. Quick math here: originally we were going to pay 12.2%. That means we’re going to keep about 87.8% or $0.87 of every dollar. That’s what’s going on right now. So if I earn $500,000, this is fully taxable — we’re going to get to keep about $439,000 of that money. And the rest goes to tax. Not fun seeing that $61,000 or so of tax go out the window, but it’s a whole lot better than what you’d be paying if you were a sole proprietor earning that $500,000.

Kyle Pearce: When we keep the extra $5,000, we actually have more money — $444,000. But what we did is we ran some quick numbers and said, listen, if I took the $439,000 out today before these tax changes, getting taxed at the regular 12.2% rate, I take that $439,000 and I pull it out — all in one big lump sum, fully as ineligible dividends. We’re not gonna play with salary and mixing; there are always things we can do, but if we just take it out as an ineligible dividend, we’re gonna be left with about $229,500.

Kyle Pearce: Right now on ineligible dividends, you’re gonna be paying a total of about 47.74% on that large sum. Now, I want to clarify — that is not how much you’re going to be paying if you’re in a low tax bracket. But you are going to be in a high tax bracket if you take all of this money out at once as we’re doing in today’s example. So we’re talking highest marginal tax rate, worst case scenario here. You’re paying about 47.74% total on that money and you get to keep just shy of $230,000 — you get to keep $229,500.

Kyle Pearce: Now, here’s the magic trick. After January 1st, 2027, that ineligible dividend rate at a personal level — the actual effective rate you’d pay on this large amount being in the highest tax bracket — is going to move up from 47.74% to 48.89%.

Jon Orr: So 1.15% more. I had a 1% reduction on the provincial corporate tax. On the personal side on dividends, I’m paying 1.15% more as it comes out.

Kyle Pearce: Right. And if I just do some quick math on that — I got to save 1%, and then on that amount that I get, I get to pay more than 1%. For a lot of people, they might say that doesn’t make a huge difference. And actually it doesn’t make a massive difference. But it is more. And therefore, even though we’re taking out a larger sum — remember $5,000 more, that’s $444,000 — we are going to get to keep around $227,000. So that $444,000 is $5,000 more than what we’d have after corporate tax currently, because we saved the extra 1% — 1% of $500,000 is $5,000 more in my corporation.

Kyle Pearce: But if I do choose to pull the entire amount out, I’m gonna pay a little bit higher at that effective tax rate. And it turns out that round trip, I’m actually in the hole about $2,500. Now, a lot of people might look at that and say, come on, it’s almost half a million dollars — $2,500 isn’t that much. But in reality we have to recognize that this is a net negative for those who have a lot of retained earnings in their corporation, and the more retained earnings we have over time, the bigger this tax drag would become. The headline says we’re going to save all this money, which again is true for the small business — but it’s certainly not helpful for the small business owner at a personal level.

Jon Orr: Right. So overall, if you’re looking at that headline and you’re saying the 1% decrease is great — it is. But at some point, those dollars have to hit human hands and they have to come out somehow. Like Kyle said, you can be strategic with salary, you can be strategic in other ways. But if you just put it in the dividend and paid yourself a dividend, this is just a worse deal. It’s not the gift that maybe some headlines are showing. And now you have to ask the question — why would they do that? What’s the incentive here? What are they trying to create?

Jon Orr: Because adjusting policy like this, to me, is always about incentives, not actual tax dollars. Because it’s like, do we really need to get $2,500 for every business owner who’s making half a million dollars? To me, it’s more of an incentive. Because if I have to pay more to take it out than I used to, my incentive is to keep it in there. I got a reduction on my corporate rate. It’s going to cost me more to take it out. So why don’t I keep it in there and grow it? To me, this is an incentive to keep small businesses growing money at the corporate level and reinvest that money inside the business to grow the business, to grow the economy.

Kyle Pearce: Yeah, I 100% agree with that. And I think it does make sense because we do want to stimulate the economy. They’re kind of saying, listen, we’d rather see those retained earnings instead of going into passive income generating things like dividend paying stocks or private lending — we actually want you to be more encouraged to take those retained earnings, reinvest them into your own business and create yourself a going concern. A business that’s going to continue growing and helping out the economy. That means you probably need more employees, there’s going to be more jobs. Like all of these things make a ton of sense.

Kyle Pearce: And then on the other hand, if that’s not in your cards and you just want to run a small business and not scale — they’re trying to make it as equal as possible for everyone. They don’t want you as a business owner to get some sort of advantage that a T4 employee is not going to have. So there’s a lot of logic to this. However, the part that often gets overlooked is the fact that when you do run a small business, any business, there’s so much risk associated with it. In a way, I think all business owners feel like we should get some sort of discount, some sort of advantage, because you took a chance and you’re trying to help grow the economy. So I totally get both sides of this argument.

Kyle Pearce: And as business owners, what we want to do is make sure that we’re helping to educate others like us so that you understand how it works. Because once we know how it works, we can actually utilize tools that are available to us to better mitigate some of this tax burden. It’s not about completely avoiding tax or anything like that, but just being smart about what we do with these dollars in a way that’s going to try to help us grow our net worth over time and keep more of those dollars working for us and not against us.

Jon Orr: Yeah, two conclusions I tend to think about here. One is — does this make you rethink how much salary you’re actually paying yourself? If it’s now costing more in dividends, does it make a better case for paying more salary to get money out on a regular basis? That’s a question many people are going to now ask themselves, even though like you said, it’s $2,500 — it’s not a huge amount of shifting here.

Jon Orr: The other question is about timing. If you have to pull retained earnings out this year and you take them all out, you might want to think about taking them out before January 1st, 2027 — because they’re not shifting the personal tax rate right away, so there may be an advantage to acting before that date.

Kyle Pearce: Yeah, absolutely. For those of us who are very long term focused and constantly thinking about efficiency and trying to hang on to every dollar — if you need it, it might make sense to pull it before January. But if you don’t need it, keep in mind that taking more money than you need — if it isn’t going to go into an RRSP, an IPP, or a PPP where you’d get your tax back — you’re just creating more tax problem later. Those are good problems to have. But the reality is I still like keeping retained earnings that I don’t need for my lifestyle and that I don’t need for registered or tax-deferred buckets.

Kyle Pearce: I still see the corporation as a great opportunity to build and structure, but it’s just being cautious about what we’re putting those funds into and recognizing the risk in not tax planning. Because if we don’t understand the rules, it’s money that’s going to consistently go out the door unnecessarily.

Kyle Pearce: An example: I was on a call earlier this week with someone who has $7 million of retained earnings in one of their operating companies. It’s just sitting in an interest-bearing account generating just north of 2% per year. That 2% per year has actually ground down their small business tax rate all the way to zero — meaning this conversation we’ve had here today doesn’t even apply to them, because they’ve earned more than $150,000 of passive income. In Ontario at least the provincial tax rate is still applied, but the federal one is ground down to zero. This individual had no clue that they weren’t receiving a small business tax deduction across any of their operating companies on the first $500,000.

Kyle Pearce: So the interest they kept after passive income tax — about $80,000 — was actually how much extra tax they were paying because they gave up the small business tax deduction. The return on that 2-and-change percent interest they were making on $7 million was effectively zero. They thought they were somewhat keeping up with inflation for the interim. In reality, they were way behind because they’re giving it all away in other tax consequences. So these are the efficiency pieces that are really important.

Kyle Pearce: And I would argue that — we talk about the Smith Maneuver, we talk about leverage, all of these things — yes, there is risk associated with leveraged investing, there is risk associated with making certain types of investments. But if you’re giving up 50% or more of your actual income on an annual basis unnecessarily, to me that’s a much greater risk than using leverage to write off some of that income and actually grow your net worth, your cashflow, and build a legacy that lasts over the long term.

Jon Orr: Good point, good point. In a future episode, we’re going to re-look at this scenario and ask the question — if paying yourself a dividend over the course of many years isn’t the best option, what are the great options? How do I look at whether I want to reinvest it in the corporation in passive income or non-passive income, and how do I look at that over the long term? So we’ll answer that in a future episode.

Jon Orr: We do want to thank you for joining us to unpack this. When we think about our healthy financial wealth planning system, the third stage is the optimization stage — that’s looking at our structures, looking at these moves, and asking the hard questions. What should we do when we’re in a situation where we’re paying more tax than we should, and we need to learn about the structures? If you want more information on our four different pillars, one of them being the optimization stage, we encourage you to head on over to our website to take our free healthy financial health assessment. Scroll down in your podcast platform and click the link to the assessment. We’ll send you a report on those four pillars of a healthy financial system. You’ll also see a link to book a call with us if you want us to take a deeper dive into your unique system, your unique constraints, and what your finances look like.

Kyle Pearce: And just as a reminder, this should not be taken as anything but educational purposes only. There is no accounting, tax, legal, or financial advice given. Always seek out a professional. And as a reminder, Kyle is a licensed life and accident and sickness insurance agent and the president of corporate wealth management here at Canadian Wealth Secrets.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

OPTIMIZE YOUR FINANCIAL FUTURE