New Tax Law Changes for 2026: What Ontario Small Businesses Need to Know
As we enter 2026, several important tax law changes are taking effect that will impact small business owners across Ontario. Understanding these changes now allows you to adjust your financial planning, maximize deductions, and avoid costly mistakes when you file your 2025 tax return this spring.
At BBS Accounting, we stay on top of every federal and provincial tax change to ensure our Toronto clients are always positioned for success. Whether you’re a sole proprietor, partnership, corporation, or professional services provider, these updates will affect how you report income, claim deductions, and plan for the year ahead.
Federal Tax Brackets and Basic Personal Amount
The federal government indexes tax brackets annually to account for inflation. For the 2025 tax year being filed in 2026, the federal tax brackets have been adjusted upward.
The Basic Personal Amount (BPA) has increased to $15,705 for 2025, meaning all Canadians can earn this amount tax-free before federal tax applies. This represents an increase from the previous year’s $15,000.
The federal tax brackets for 2025 are now 15% on the first $55,867 of taxable income, 20.5% on income over $55,867 up to $111,733, 26% on income over $111,733 up to $173,205, 29% on income over $173,205 up to $246,752, and 33% on income over $246,752.
For small business owners operating as sole proprietors or partners where business income flows to your personal return, these adjustments mean you can earn slightly more before moving into a higher tax bracket.
Ontario Provincial Tax Changes
Ontario also adjusts its tax brackets and credits annually. For 2025, the Ontario basic personal amount is $11,865, up from the previous year.
Ontario’s tax brackets for 2025 are 5.05% on the first $51,446, 9.15% on income over $51,446 up to $102,894, 11.16% on income over $102,894 up to $150,000, 12.16% on income over $150,000 up to $220,000, and 13.16% on income over $220,000.
Ontario residents pay both federal and provincial tax, so understanding both systems is essential for accurate planning.
Small Business Deduction Rate
The federal small business deduction (SBD) allows eligible Canadian-Controlled Private Corporations (CCPCs) to pay a reduced tax rate on active business income.
For 2026, the federal small business tax rate remains at 9% on the first $500,000 of active business income. Combined with Ontario’s provincial small business rate of 3.2%, qualifying Ontario corporations pay a combined rate of only 12.2% on small business income, compared to the general corporate rate of 26.5%.
This substantial tax advantage makes incorporation attractive for profitable businesses. However, you must meet specific criteria including being a CCPC, earning active business income (not investment income), and staying within the business limit.
The $500,000 business limit is shared among associated corporations, so if you own multiple related businesses, you’ll need to allocate this limit among them.
Capital Cost Allowance (CCA) Changes
Capital Cost Allowance is Canada’s equivalent of depreciation, allowing you to deduct the cost of assets over time rather than all at once.
Several CCA classes have seen changes for 2025. The Accelerated Investment Incentive (AII) continues to phase down. For eligible property acquired in 2025, the first-year CCA rate is 1.5 times the normal rate (down from the original 3 times enhancement).
This means if you’re purchasing equipment, vehicles, or other depreciable property, you can still claim an enhanced deduction in the first year, but the benefit is decreasing annually. By 2028, the AII will be fully phased out.
Zero-emission vehicles continue to receive preferential treatment. Class 54 (passenger vehicles costing less than $61,000) and Class 55 (passenger vehicles costing $61,000 or more) allow 100% write-off in the first year for qualifying electric vehicles.
For non-zero emission passenger vehicles, the CCA limit remains at $37,000 before tax for 2025. Any cost above this limit cannot be depreciated.
Immediate Expensing for Small Businesses
Canadian-Controlled Private Corporations can immediately expense up to $1.5 million in eligible property annually. This allows you to deduct the full cost of equipment, furniture, computer hardware, and certain buildings in the year of purchase rather than depreciating over many years.
This measure is set to be available until 2025 (for property acquired before 2026), so if you’re planning major equipment purchases, 2025 is an advantageous year. Confirm with your accountant whether this measure has been extended beyond 2025.
Eligible property includes most depreciable capital property except buildings in certain CCA classes. The immediate expensing limit is reduced if you have passive investment income over $50,000 or taxable capital employed in Canada over $10 million.
GST/HST Small Supplier Threshold
The GST/HST small supplier threshold remains at $30,000 in annual revenues. If your business earns less than $30,000 in a calendar quarter and over the previous four quarters, you’re not required to register for GST/HST.
However, voluntary registration can be advantageous if you have significant business expenses subject to GST/HST, as registration allows you to claim Input Tax Credits (ITCs) for tax paid on purchases.
In Ontario, the HST rate is 13%, consisting of 5% federal GST and 8% provincial component. Every HST dollar you pay on business purchases can be recovered if you’re registered, representing significant savings for equipment purchases, rent, professional services, and other taxable supplies.
Canada Pension Plan (CPP) Contribution Changes
CPP contribution rates and maximums increase annually. For 2026, the CPP contribution rate is 5.95% for employees and employers each (11.9% for self-employed individuals).
The Year’s Maximum Pensionable Earnings (YMPE) for 2026 increases to $71,300, with a basic exemption of $3,500. This means the maximum CPP contribution for employees is $4,055.85 and $8,111.70 for self-employed individuals.
Starting in 2024, the Canada Pension Plan 2 (CPP2) enhancement came into effect. For 2026, there’s an additional CPP2 contribution of 4% (split between employee and employer) on earnings between the YMPE and the Year’s Additional Maximum Pensionable Earnings (YAMPE), which is $81,200 for 2026.
Self-employed individuals in Ontario must pay both employee and employer portions of CPP, representing a significant expense that should be factored into your pricing and tax planning.
Employment Insurance (EI) Premium Changes
The EI premium rate for 2026 is $1.64 per $100 of insurable earnings for employees (up to maximum insurable earnings of $65,000), with employers paying 1.4 times the employee rate.
Self-employed individuals can opt into the EI program for access to special benefits like maternity, parental, sickness, and compassionate care benefits, but it’s optional. The rate is $1.64 per $100 of self-employment earnings up to the maximum.
For Ontario employers, the reduced EI premium rate available in some provinces doesn’t apply. Ontario employers pay the standard 1.4 times multiplier.
RRSP Contribution Limit Increase
For 2026 taxation year, the RRSP contribution limit increases to $32,490 or 18% of your 2025 earned income, whichever is less.
This is particularly relevant for business owners who want to reduce personal taxable income while building retirement savings. RRSP contributions made by March 2, 2026 can be deducted on your 2025 return.
If you have accumulated RRSP contribution room from previous years (shown on your Notice of Assessment), you can contribute and deduct amounts above the annual limit.
Business owners with incorporated companies should consider setting salaries to generate RRSP contribution room, as dividend income doesn’t create RRSP room. This requires balancing salary versus dividend decisions with your accountant.
TFSA Contribution Room
The Tax-Free Savings Account contribution limit for 2026 is $7,000, continuing the increase from previous years.
While TFSA contributions aren’t tax-deductible, the tax-free growth makes TFSAs excellent for business owners saving for goals where you’ll want tax-free withdrawals.
Track your TFSA contribution room carefully. Over-contributions are subject to a 1% per month penalty. Your available room is shown in your CRA My Account.
Ontario Business Grants and Credits
Ontario continues to offer several business-focused tax credits and grants:
The Ontario Innovation Tax Credit (OITC) provides a 8% refundable tax credit on eligible R&D expenditures performed in Ontario, in addition to federal SR&ED credits.
The Ontario Research and Development Tax Credit offers a 3.5% refundable tax credit on eligible R&D expenditures for corporations.
The Apprenticeship Training Tax Credit provides credits for employers who train apprentices in eligible trades.
The Regional Opportunities Investment Tax Credit offers a 10% refundable tax credit for businesses making eligible investments in specified regions of Ontario.
Many Ontario business owners miss these credits simply because they don’t know they exist. At BBS Accounting, we review every client’s eligibility for Ontario and federal credits and grants.
Digital Service Tax Considerations
Canada is implementing a Digital Services Tax (DST) on certain digital services revenue. This affects businesses earning substantial revenue from online marketplaces, online advertising, social media, and user data sales.
The DST applies at a rate of 3% on certain digital services revenue. Most small businesses won’t meet the thresholds (€750 million global revenue and over $20 million Canadian digital services revenue), but if you operate a platform business, this is worth understanding.
Enhanced Climate Action Incentive
Ontario residents receive the federal Climate Action Incentive Payment (CAIP) quarterly. For 2026, the amounts have increased. While this isn’t a business credit, it’s worth noting for your personal finances.
As a business owner, if you’re concerned about carbon pricing impacts on your operating costs, track fuel and heating expenses carefully. Some industries may qualify for relief measures or credits.
Scientific Research and Experimental Development (SR&ED)
The SR&ED program continues to provide generous tax incentives for Canadian businesses conducting research and development.
For CCPCs, the enhanced credit rate of 35% applies to the first $3 million of qualified expenditures. Above this limit, the rate is 15%. The expenditure limit is gradually reduced if you have taxable income between $500,000 and $800,000 or taxable capital between $10 million and $50 million.
Many Toronto businesses don’t realize their work qualifies as SR&ED. Software development, product improvements, process innovations, and solving technical uncertainties can all qualify. At BBS Accounting, we help clients identify and document SR&ED activities to maximize claims.
Home Office Expense Rules
With remote work remaining common, home office expense deductions continue to be important for many business owners and employees.
If you’re self-employed, you can deduct reasonable home office expenses if your home is your principal place of business or you use it regularly and exclusively for business meetings with clients.
Eligible expenses include a proportionate share of rent, mortgage interest (not principal), property taxes, utilities, home insurance, and maintenance based on the space used. If your home office is 10% of your home’s square footage, you can deduct 10% of these costs.
For employees, the temporary flat rate method ($2 per day up to $500) that was available during COVID has ended. Employees must now use the detailed method, requiring Form T2200 from their employer.
Changes to Trust Reporting
New trust reporting requirements came into effect for 2023 and continue for 2025 returns. Many trusts that previously didn’t need to file returns now must file a T3 return and Schedule 15.
This affects family trusts, bare trusts, and alter ego trusts. Penalties for non-compliance are severe. If you have any trust arrangements, consult with BBS Accounting to ensure compliance.
Digital News Subscription Tax Credit
Canadians can claim a 15% non-refundable tax credit on up to $500 of eligible digital news subscriptions, providing a maximum credit of $75. While modest, this is worth claiming if you subscribe to Canadian digital news media for business research or staying informed.
Employee Ownership Trust (EOT) Rules
Canada introduced new rules to facilitate employee ownership trusts, providing a capital gains exemption when selling a business to an EOT. If you’re considering business succession planning, this new option might provide tax-efficient transition to employee ownership.
The capital gains exemption for qualifying business transfers to EOTs can significantly reduce tax on business sales, making this an attractive succession option compared to third-party sales.
Looking Ahead: Proposed Changes
Several tax changes are under consideration for future years:
The federal government has proposed changes to Alternative Minimum Tax (AMT) that could affect high-income business owners. Stay informed as these rules are finalized.
Capital gains inclusion rate changes have been discussed federally. Currently, 50% of capital gains are taxable, but this could change. Monitor announcements carefully if you’re planning asset sales.
Enhanced reporting requirements for trusts and certain transactions continue to evolve. Compliance is becoming more complex, making professional accounting advice increasingly valuable.
Working with BBS Accounting
Tax law complexity continues to increase, and these changes represent just the highlights of what’s new for 2026. Depending on your business structure, industry, and specific circumstances, other provisions may be more relevant to your situation.
At BBS Accounting in Toronto, our team stays current on all federal and Ontario tax law changes. We help small business owners and professionals throughout the GTA implement strategies tailored to their unique situations.
Whether you’re a sole proprietor working from home, a growing incorporated business, a professional services provider, or anywhere in between, we can help you navigate these changes and position your business for success.
Taking Action Now
Don’t wait until year-end to think about these changes. Schedule a consultation with BBS Accounting to review your current tax strategy with these new provisions in mind. We’ll help you develop a proactive plan that takes advantage of available benefits while ensuring CRA compliance.
The small business owners who thrive are those who treat tax planning as an ongoing process rather than an annual scramble. Contact BBS Accounting today to discuss how these 2026 tax law changes affect your specific situation and what strategic moves you should consider making now.
Let us help you keep more of what you earn while staying fully compliant with all CRA and Ontario requirements.
