When tax season arrives and the numbers start to feel like a puzzle, many business owners might wonder, “How does corporate tax work in Canada?” While this question can lead to even more questions, corporate tax lawyers are here to help. In this article, we will discuss the basics of corporate tax under Canadian laws, so that you can file your returns with confidence and avoid tax-time headaches.
What is corporate tax?
Whether you’re a small business owner or part of a big corporation, you need to file and pay your corporate income taxes for your company. This is because under Canadian law, all corporations that are residents of Canada must file their annual income tax returns, unless exempt.
The amount of corporate tax your company pays depends on its taxable income. While the general federal corporate tax rate is 38 percent, it can be reduced to as low as 15 percent after abatement and other deductions. Some Canadian-controlled private corporations (CCPCs) qualify for a lower rate of 9 percent on the first $500,000 of active business income. Provinces and territories also set their own tax rates, so the total tax rate will depend on where your company does its business.
Watch this video to learn more about corporate taxes and how they work in Canada:
Having difficulty filing your corporate tax returns? Reach out to the best corporate tax lawyers in Canada as ranked by Lexpert for smart solutions to your corporate tax issues.
What laws govern corporate taxes in Canada?
The Income Tax Act (ITA) is the law governing income taxes in Canada, which includes capital taxes for corporations and small businesses, and requirements for filing a T2 Corporation Income Tax Return. The ITA is enforced by the Canada Revenue Agency (CRA), which also administers provincial income tax and sales tax for a few provinces. The ITA provides the rules for calculating corporate income taxes, while tax returns are filed with the CRA.
On top of the ITA are your provincial and territorial tax laws. These local rules work alongside the ITA and can affect the total tax your company pays. This means you must follow both federal and provincial or territorial tax laws when filing your corporation’s income tax returns.
How does corporate tax work in Canada?
The rate for corporate taxes in Canada depends on:
- the type of corporate income earned
- the financial status of the corporation (i.e., if you’re a small business or not)
- the province or territory where:
- the corporate income was earned
- where the corporation is located
To determine the specific rate that applies to your corporation, it's best to consult a Canadian corporate tax lawyer, who can also help with filing your corporation's income tax returns.
Corporations exempt from taxes
The ITA imposes corporate income taxes on all Canadian-resident corporations and foreign corporations doing business in Canada. However, there are exemptions, including:
- Crown corporations
- Hutterite colonies
- labour organizations
- limited-dividend housing companies
- municipal authorities
- mutual insurance corporations
- non-profit organizations, and the following non-profits:
- agricultural organizations, board of trade, or chamber of commerce
- housing corporations
- scientific R&D corporations
- pension trusts, or other trust corporations and savings plans
- registered corporations, specifically:
- amateur athletic associations
- charities
- journalism organizations
Although these corporations are exempt from paying income taxes under the ITA, they are still required to file a corporate income tax return even if no taxes are payable, except for:
- Crown corporations
- Hutterite colonies
- registered charities
Corporate tax rates (federal)
The basic rate for federal corporate income tax is 38 percent of the corporation’s taxable income. This is also referred to as the Part I tax (of the ITA). However, this rate may be lowered through the following tax incentives under the ITA:
Federal tax abatement
This 38 percent basic rate can be reduced by the federal tax abatement, which is equal to 10 percent of the taxable income earned for a year. However, the income must be earned in Canada. As a result, the federal corporate income tax of 38 percent may be lowered to 28 percent after this abatement.
General tax reduction
The 28 percent federal corporate income tax after abatement can be further reduced after general tax reductions, currently at 13 percent, resulting in a 15 percent net tax rate. A corporation can only use this general tax reduction when it is applied on taxable income, which is subject to the 38 percent basic rate.
This general tax reduction also does not apply to:
- 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 tax investment income may be reduced by other refundable tax provisions under the ITA
- investment corporations
- mortgage investment corporations
- mutual fund corporations
Small Business Deduction (SBD)
The 28 percent net tax rate after federal tax abatement may be reduced for CCPCs, which are eligible for small business deductions (SBDs). Under the ITA, a CCPC qualifies if most of the fair market value of its assets are:
- mainly used as an active business primarily carried in Canada
- shares or debts of connected corporations, which are small businesses
- a combination of both
These CCPCs can use the 19 percent small business deduction, resulting in a 9 percent net tax rate after SBD. But depending on the following circumstances, the 19 percent SBD may be applied to whichever of the following results in the lowest 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)
Filing of corporate tax returns
As for the filing of your corporate taxes, here are some rules to follow:
- all filings must be done electronically, except for some corporations
- the return must be filed within six months after the end of each tax year
Corporate tax rate for small businesses
Again, small businesses in Canada pay lower taxes compared to other corporations due to the tax incentives offered by the federal, provincial, and territorial governments. These incentives reduce businesses’ Part I tax under the ITA.
When small businesses are eligible for SBDs:
- the small business tax rate may be as low as 9 percent (after applying the federal tax abatement)
- small businesses may also qualify for lower corporate income tax rates prescribed by their province or territory
Here’s a video that shows how small business taxes work, specifically in Ontario:
Check out our directory of the Lexpert-ranked best Canadian law firms for corporate tax if you’re looking for lawyers to help you with your corporate taxes.
SBDs and the provincial or territorial corporate taxes
The provincial and territorial income tax rates include a lower rate and a higher rate. The lower rates of corporate tax may be applied to CCPCs that are eligible for SBDs, while all other income is taxed at the higher rate.
Business limit of SBD
The business limit is one factor in determining the SBD. All Canadian provinces and territories have adopted the federal business limit, which is at $500,000 for 2025, except for:
- Saskatchewan: $600,000
- Nova Scotia: $700,000
Foreign corporations
In addition to resident corporations, the following are subject to the corporate income tax regime found in the ITA:
- foreign corporations doing business in Canada
- non-resident foreign corporations doing business in Canada through their branches in Canada
Some tax incentives are also given to foreign corporations if the following applies:
- the business is a resident of a country with which Canada has a double-tax treaty
- the business is eligible to claim the benefits under the double-tax treaty
However, this tax incentive does not apply to profits earned through a permanent establishment of the foreign corporation in Canada.
How can lawyers help with corporate taxes?
Aside from explaining the tax rules in plain language, corporate tax lawyers can do other roles in helping you manage your corporate income taxes, such as:
- guiding you through the steps of preparing and filing your corporation’s returns
- helping you determine if you qualify for SBD or other tax credits, which can lower your tax payable
- stepping in to handle tax issues (e.g., tax audits or when you receive notices from the CRA)
- informing you when there are new tax rules that will apply to your business
How does corporate tax work in Canada: keep calm and file on
Understanding how corporate taxes work in Canada helps your business avoid last-minute stress. Filing returns on time and staying up to date with the law and CRA rules protects you against costly mistakes. If things ever get confusing, a quick call to a corporate tax lawyer can help. With the basics covered, your business can face the tax season with confidence.
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