How does corporate tax work in Canada

Learn more about corporate taxes in Canada, the laws and regulations governing corporate taxes for its compliance, with this article
How does corporate tax work in Canada

The statutory tax rates for corporate tax in Canada generally depends on the type of the corporate income that was earned, the financial status of the corporation (i.e., small businesses are eligible for smaller tax rates through tax incentives), and the province or territory in which the corporate income is earned, or where the corporation is located.

Income Tax Act

The Income Tax Act (ITA) is the law governing income taxes in Canada, which includes capital taxes for corporations and small businesses. The ITA is enforced by the Canada Revenue Agency (CRA), which also administers provincial income tax and/or sales tax for a few provinces. The provisions of the ITA provide for the general computation of corporate income taxes, whereas the filing of the tax return is done before the CRA.

The ITA imposes corporate income taxes upon all Canadian-resident corporations, even foreign corporations doing business in Canada. The only exempted corporations (Section 149) are:

  • Crown corporations
  • municipal authorities
  • registered charities
  • non-profit agricultural organizations, board of trade, or chamber of commerce
  • registered amateur athletic association
  • registered journalism organizations
  • non-profit housing corporations
  • limited-dividend housing companies
  • non-profit scientific R&D corporations
  • labour organizations
  • non-profit organizations
  • mutual insurance corporations
  • pension trusts, or other trust corporations and savings plans
  • Hutterite colonies

Although these above-stated corporations are exempted from paying income taxes under the ITA, they are still required to file a corporation income tax return even if there are no payable taxes. It is only tax-exempt Crown corporations, Hutterite colonies, and registered charities which are exempt from filing their corporation income tax returns.

 

Corporate Income Tax Computation (Section 82 (1))

Generally, the federal corporate income tax is at 38% of the corporation’s taxable income. This is also referred to as the Part I tax (of the ITA). This rate may be lowered through several tax incentives, as explained below. But for additional clarification, it is better to consult with a Canadian corporate tax lawyer, who may also help corporations for its filing of tax returns.

Federal Tax Abatement (Section 124)

The federal corporate income tax rate of 38% may be lowered after applying the federal tax abatement. The federal tax abatement is equal to 10% of the taxable income earned for the given year, but only when such income is earned in Canada. This means that income earned outside of Canada (foreign income) cannot be included for the computation of federal tax abatement. As a result, the federal corporate income tax of 38% may then be lowered to 28% after the said abatement.

General Tax Reduction (Section 123.4 (1))

The 28% federal corporate income tax after abatement may also be reduced further after general tax reductions, which is currently at 13%, resulting to a 15% net tax rate. Generally, a corporation may only use the general tax reductions when it is applied on taxable income, which is subject to the 38% rate of federal corporate income tax. As such, the general tax reduction does not apply to:

  • Canadian-controlled private corporations (CCPCs);
  • Corporations whose income taxes may be reduced for its generation of electrical energy for sale or the production of steam for sale;
  • Corporations whose income taxes investment income may be reduced by other refundable tax provisions under the ITA;
  • Investment corporations;
  • Mortgage investment corporations; and
  • Mutual fund corporations.

Small Business Deduction

The 28% net tax rate after federal tax abatement may be reduced in the case of Canadian-controlled private corporations (CCPCs) who are eligible for small business deductions (SBDs).

For the purposes of taxation, the ITA defines SBDs as CCPCs where most of the fair market value of its assets (Section 248 (1)) are:

  • mainly used as an active business primarily carried in Canada by the said CCPC or by a related corporation;
  • shares or debts of connected corporations which are small business corporations; or
  • a combination of both.

These CCPCs may avail of the 19% tax reduction of SBD, who may now have a 9% net tax rate after SBD. But, depending on the following circumstances, the 19% SBD may be applied among the following, whichever would result to a lesser tax:

  • the income from active business carried in Canada
  • the taxable income
  • the business limit
  • reduced business limit less the amount of the business limit assigned (when a CCPC assigned all or any portion of its business limit to another CCPC)

What is the corporate tax rate for small businesses in Canada?

Small businesses in Canada pay smaller taxes compared to other corporations due to the tax incentives offered by the federal and the provincial or territorial governments. When small businesses are eligible for small business deductions (SBDs), after prior deduction from the federal tax abatement, the small business tax rate may reach as low as 9%. In addition, small businesses may only have to pay the lower rates by their province or territory.

Provincial or Territorial Income Tax Rates

Generally, the provincial and territorial income tax rates have a lower rate and a higher rate. These lower rates of corporate tax may be applied to CCPCs who are eligible for SBDs; all other income would be applied the higher rate.

Business Limit

In determining the SBD, one factor is the business limit. All Canadian provinces and territories have adopted the federal business limit, which is currently at C$500,000 as of 2023, except for Saskatchewan which is at C$600,000. Notably, the provinces of Quebec and Alberta both do not have corporation tax collection agreements with the CRA.

Foreign Corporations

Foreign corporations doing business in Canada, even non-resident foreign corporations doing business in Canada through a branch or branches across the country, are still subject to the corporate income tax regime found in the ITA.

However, certain tax incentives are also given to foreign corporations, such as when the foreign corporation is resident of a country which Canada has a double-tax treaty and is eligible to claim the benefits in the said double-tax treaty. Although, this tax incentive by a treaty does not apply to profits earned through a permanent establishment of the foreign corporation located in Canada.

Read more: How and where to pay corporate income tax

Want to know more about the Canadian laws and regulations on corporate taxes? Consult with the best corporate tax lawyers in your area, such as those in Ontario hiring a corporate tax lawyer in Ontario due to some provincial laws varying between each province.