PSB Tax Rate in Ontario for 2026: 44.5% vs 11.2% Explained With Numbers

The PSB tax rate in Ontario is 44.5% for 2026. A corporation that is not a PSB pays 11.2% on its first $500,000 of active business income earned from July 1, 2026. A December 31, 2026 year-end gets a blended 11.70%, because income earned before July 1, 2026 was taxed at 12.2%.

Key takeaways

What is the PSB tax rate in Ontario for 2026?

The combined federal and Ontario tax rate on personal services business income is 44.5% for 2026. That is 33% federal plus 11.5% Ontario.

I see a lot of incorporated contractors who know the small business rate well. Fewer know the PSB rate, because it only shows up when CRA decides your corporation is really standing in for an employee. If that happens, your corporation loses the low rate on its contract income and pays 44.5% instead. Most of its expenses are denied as well.

A personal services business exists under subsection 125(7) of the Income Tax Act when the person doing the work, or a person related to them, owns 10% or more of any class of shares, directly or indirectly, and that person would reasonably be regarded as an officer or employee of the client if the corporation did not exist. There are two exceptions: more than five full-time employees in the business throughout the year, or income received from an associated corporation. Whether owners or family members count toward the five needs review. Our post on what is a personal services business walks through the definition for IT contractors.

This post is about the rate and the dollars. If you want to know where you stand on the facts, start with our guide to personal services business risk.

What changed on July 1, 2026?

The 2026 Ontario Budget cut Ontario’s small business rate to 2.2%, down from 3.2%, starting July 1, 2026. The federal small business rate stays at 9%. So the combined Ontario small business rate is now 11.2%. Before July 1, 2026, it was 12.2%.

The small business limit did not change. It is still $500,000 of active business income a year, shared by associated corporations. Income above that limit is still taxed at the general rate of 26.5% (15% federal plus 11.5% Ontario).

The PSB rate did not change either. A PSB never had access to the small business rate, so a cut to that rate does nothing for it. The result is a wider gap. Before July 1, 2026, the gap between the PSB rate and the small business rate was 32.3 percentage points. From July 1, 2026, it is 33.3 points.

Here is the current comparison in one line: 11.2% vs 44.5%.

Why does a December 31, 2026 year-end get 11.70%?

The Ontario cut is prorated by days for taxation years that straddle July 1, 2026. A calendar-year corporation with a December 31, 2026 year-end has 365 days in its taxation year:

• January 1, 2026 through June 30, 2026: 181 days at 12.2%.
• July 1, 2026 through December 31, 2026: 184 days at 11.2%.

The day-weighted rate is 11.69589%, which rounds to 11.70%. On $150,000 of small business income, that is $17,543.84 of corporate tax.

What rate applies to other year-ends?

It depends on how many days of the taxation year fall before July 1, 2026.

• A June 30, 2026 year-end falls fully before the cut. The whole year is taxed at 12.2%.
• A March 31, 2027 year-end runs from April 1, 2026. That gives 91 days at 12.2% and 274 days at 11.2%, a blended 11.45% (11.44932% exact).
• A June 30, 2027 year-end is the first 12-month year that falls fully after the cut. It gets the full 11.2%.

Our PSB tax cost calculator does this proration for any 12-month year-end you enter, and shows the PSB figure next to it.

How is the 44.5% PSB rate built?

The 44.5% comes from four federal pieces and one Ontario piece. Here is how I explain it to clients.

1. Start with the federal base rate of 38%. Every corporation starts here.
2. Take off the 10% provincial abatement. This leaves room for the provinces to tax corporate income. The federal rate is now 28%.
3. No 13% general rate reduction. A regular corporation earning income above the small business limit gets this reduction, which brings it to 15% federal. PSB income is excluded from it. It also gets no small business deduction, which is what brings small business income down to 9%.
4. Add the 5% additional tax under section 123.5. This tax applies only to PSB income. The federal rate is now 33%.
5. Add Ontario’s 11.5% general rate. Ontario’s small business rate is not available on PSB income either.

So 28% plus 5% is 33% federal, and 33% plus 11.5% is 44.5%.

Compare that with the 26.5% general rate. A regular corporation over the small business limit pays 15% federal (28% less the 13% reduction) plus 11.5% Ontario. The PSB pays 18 percentage points more than that, because it loses the 13% reduction and adds the 5% tax.

How much tax is that in dollars?

Here is the same $150,000 of retained corporate income taxed at each rate. This assumes no salary and no expenses, so you can see the rate effect alone.

At the current rates, PSB treatment costs $49,950 more on $150,000. That is the cost of the rate alone.

What happens to expenses in a PSB?

The real gap is usually bigger, because paragraph 18(1)(p) denies most PSB expenses. A PSB can deduct salary, wages or other remuneration paid to the incorporated employee, the cost of benefits or allowances for that person, certain costs of selling property or negotiating contracts that an employee could deduct, and legal costs to collect amounts owed for services. Rent, software, equipment, travel, phone, insurance and accounting fees are denied.

Take a contractor billing $95 an hour for 37.5 hours a week over 48 weeks. That is $171,000 of revenue. Say the corporation has $9,000 of expenses and pays no salary, in a full year at 11.2%.

• Not a PSB: $162,000 x 11.2% = $18,144.
• PSB: expenses denied, so $171,000 x 44.5% = $76,095.
• Extra corporate tax: $57,951.

CRA can also reassess more than one year, and each year is tested on its own facts. Our post on PSB reassessment explains how denied deductions and back years add up.

How do GRIP and eligible dividends work for PSB income?

Corporate tax is only half the story. The money still has to come out of the corporation to you.

When a corporation earns small business income at 11.2%, the dividends it pays from that income are usually non-eligible dividends. Those are taxed at up to 47.74% in Ontario for 2026.

PSB income is different. It is not eligible for the small business deduction, so it is taxed at the full rate. Income taxed at the full rate adds to the corporation’s general rate income pool (GRIP). Dividends paid out of GRIP can be designated as eligible dividends, which are taxed at up to 39.34% in Ontario for 2026.

That lower personal rate is meant to make up for the higher corporate rate. For PSB income, it does not make up for all of it.

Does integration close the gap?

No. Here is $100,000 of PSB income paid out to an owner at the top 2026 Ontario rates.

• Corporate tax at 44.5%: $44,500.
• Left to pay out: $55,500, as an eligible dividend.
• Personal tax on the dividend at 39.34%: $21,833.70.
• Total tax: $66,333.70, or 66.33% of the $100,000.

Now pay the same $100,000 as salary instead. Salary is deductible to the corporation, even for a PSB, so there is no corporate tax on it. The personal tax at 53.53% is $53,530.

The PSB route costs $12,803.70 more on every $100,000. The 5% additional tax and the lost 13% reduction are the main reasons.

This is why the salary and dividend mix matters so much when PSB risk is real. Salary is one of the few deductions 18(1)(p) still allows, so it takes income out of the 44.5% bracket. But salary brings payroll costs and is taxed in your hands. Our page on salary vs dividend for incorporated contractors covers how we think about that mix.

What changes for non-eligible dividends on January 1, 2027?

Starting January 1, 2027, Ontario cuts its non-eligible dividend tax credit to 1.9863%, down from 2.9863%. The top Ontario rate on non-eligible dividends rises to 48.89%, up from 47.74% in 2026.

The two Ontario changes work together. The corporation pays less tax on small business income from July 1, 2026. Then the owner pays more personal tax when that income comes out as a non-eligible dividend from January 1, 2027.

In dollars, at the top rate:

• A $50,000 non-eligible dividend paid in 2026: $23,870 of personal tax.
• The same dividend paid in 2027: $24,445 of personal tax.
• Difference: $575.

Eligible dividends are not affected by this change. So the 39.34% in the integration example above is not affected either.

If you take non-eligible dividends, the timing of your 2026 and 2027 payouts is worth a look before December 31, 2026. Whether paying earlier helps depends on your other income, your cash needs and your corporation’s year-end. We work through that as part of tax planning.

What does this mean for an IT or finance contractor?

The rate tells you what is at stake. It does not tell you whether you are a PSB. That depends on the whole working relationship, looked at year by year.

CRA applies the Wiebe Door and Sagaz tests. It looks at control, ownership of tools and equipment, chance of profit and risk of loss, and whether your work is part of the client’s business or your own. Fixed 35, 37.5 or 40 hour weeks, timesheet approval by the end client, VPN-only access and client laptops all point toward control. Hours alone never decide it. In an agency setup, CRA asks whether you would reasonably be an employee of the party you really provide services to. The agency contract and the end client’s onboarding rules both matter.

Three things I suggest to every contractor who reads a post like this:

• Know your number. Run your own revenue, expenses, salary and year-end through the calculator.
• Look at your facts once a year. Contracts change. A renewal with a new end client can change the picture.
• Keep your records. Contracts, invoices, other clients, your own equipment and your own business costs all help support your position.

None of this makes PSB risk go away. It helps you reduce risk and document where you stand.

How can we help with PSB tax planning?

We work with incorporated IT and finance contractors across Ontario on a fixed flat fee. We prepare corporate tax returns (T2), keep the books, run payroll with T4 slips and remittances, and file GST/HST. We review your contract and working facts as part of tax planning, and we plan your salary and dividend mix with the 44.5% rate in mind. If CRA sends a PSB questionnaire, we support you as the corporation’s authorized representative.

We are accountants, not lawyers. Contract wording is for your lawyer.

Please book a consultation if you want us to look at your numbers and your contract together. You can also call us at 647-212-9559 or email info@gondaliyacpa.ca. We are open 9AM to 8:30PM, Monday to Sunday. Please bring your latest T2 return and your current contract so we can start with your real figures.

Frequently asked questions

What is the PSB tax rate in Ontario for 2026?

The combined federal and Ontario PSB rate is 44.5%. That is 33% federal (38% less the 10% abatement, with no 13% general rate reduction, plus the 5% additional tax under section 123.5) and 11.5% Ontario.

Did the July 1, 2026 Ontario rate cut lower the PSB rate?

No. The cut lowered the Ontario small business rate to 2.2%, down from 3.2%, so the combined small business rate is now 11.2%. A PSB cannot use the small business rate, so its rate stays at 44.5%.

Why is my December 31, 2026 year-end rate 11.70% and not 11.2%?

The cut is prorated by days. Your taxation year has 181 days before July 1, 2026 at 12.2% and 184 days from July 1, 2026 at 11.2%. The day-weighted rate is 11.69589%, shown as 11.70%.

Can a PSB pay eligible dividends?

Yes. PSB income is not eligible for the small business deduction, so it is taxed at the full rate and adds to the general rate income pool (GRIP). Dividends paid from GRIP can be designated as eligible dividends.

Does paying myself a salary reduce PSB tax?

Salary paid to you is still deductible for a PSB under 18(1)(p), so it reduces the income taxed at 44.5%. It does not change whether the corporation is a PSB, and the salary is taxed in your hands.

What changes for non-eligible dividends on January 1, 2027?

Ontario cuts its non-eligible dividend tax credit to 1.9863%, down from 2.9863%. The top Ontario rate on non-eligible dividends rises to 48.89%, up from 47.74% in 2026. Eligible dividends are not affected.