Tax season presents a unique combination of challenges and problems for business owners. Even for a small corporation with few assets and a modest revenue, it can be challenging to compute the corporate tax rate because it differs from province to province and legislation can change annually.
In this article, we examine the specifics of the Canadian corporation tax rate and how the various rates impact your company. Discover all the information you require regarding federal rates, CPCC tax rates, historical rates, and tax rates pertaining to capital gains and investments.
Please note that you should never estimate your company’s corporation tax rate without first speaking with a qualified tax expert for planning and filing purposes. For individualized guidance on setting up your company tax budget, paying your taxes, and tax planning each year, get in touch with the staff at Accountor CPA. All numbers apply to the 2020 tax year.
What Is Corporate Tax Rate in Canada?
The corporate tax rate varies depending on the revenue, location, services, and income sources of a firm. However, all Canadian corporations and small enterprises operating in these various forms are subject to the corporate tax rate. Only tax-exempt Crown businesses, Hutterite colonies, and registered charities are free from this requirement in Canada.
In Canada, the federal corporation tax rate, sometimes referred to as the dual tax rate, has two tiers.
The lower tax rate, often known as the Canadian-controlled private corporation (CCPC) rate, is 9 percent for small businesses. To qualify for this corporation tax rate, you must meet specific criteria.
With a 13 percent general tax reduction and a 10 percent federal tax abatement, the general corporate federal tax rate, often known as the higher tax rate, is 38 percent, for a net tax on general corporations of 15 percent.
A corporation is also required to pay the provincial corporate tax rate, which varies from province to province, in addition to the applicable federal corporate tax rate. Additionally, there are particular corporation tax rates for dividends, capital gains, and investment income.
To help you better grasp how these corporate tax rates impact your firm, let’s focus on them individually.
Canada Federal Corporate Tax Rate
CCPCs are not the only type of corporations included by the term General Corporation. A general corporation is often made up of Canadian-resident public corporations, Canadian-resident public firms’ subsidiaries, and Canadian-resident private companies owned by non-residents. These corporate tax rates are also applied to M&P firms (manufacturing and processing corporations).
The base rate of the federal corporate income tax is 38 percent, and after a 10 percent federal tax abatement and a 13 percent general tax reduction, the effective rate of the corporate tax for general corporations is 15 percent.
The general corporate tax rate is applicable to CCPC income that exceeds the small company limit threshold in addition to General Corporation and M & P corporations.
The 13 percent general rate reduction does not just apply to the following:
1.The first $500 000 of active business income earned by CCPCs 2.Investment income of CCPCs 3.Income from certain other corporations, including mutual fund corporations, mortgage investment corporations, and investment corporations
View the 2020 chart for the Small Business (CCPC) Tax Rate for information on the CCPC corporate tax rate.
|General/ M&P Tax Rate 2020|
|Newfoundland & Labrador||15%|
|Prince Edward Island||16%|
Corporate Tax Rate for Small Business Canada
Depending on their structure and revenue, small firms in Canada may be eligible for various tax rates.
By utilizing the Small Company Deduction, Canadian-controlled private corporations (CCPCs) lower their corporate tax rate on their active business income (SBD). The SBD is based on small business restrictions, which in the majority of provinces and territories are presently $500,000. A corporation’s Part I tax obligation is decreased by the SBD.
The SBD is equal to a certain percentage (the SBD rate) of whichever of the following amounts on a corporate tax return is less:
- the income from active business carried on in Canada (line 400)
- the taxable income (line 405)
- the business limit (line 410)
- either one of the following:for tax years starting before 2019, the amount on line 427, which is the reduced business limit on line 425 less the amount of the business limit you assigned under subsection 125(3.2)
- for tax years starting after 2018, the amount on line 428, which is the reduced business limit on line 426 less the amount of the business limit you assigned under subsection 125(3.2)
You must base your estimate on the number of days in the year that each rate is in force if the rate changes during the tax year as a result of your company’s income rising or falling beyond or below the SBD level.
In addition to helping SMEs, start-ups, and small enterprises comply with their tax duties, the small business deduction also helps and incentivizes bigger corporations.
|Alberta, BC, Manitoba, New Brunswick, Newfoundland & Labrador, Nova Scotia, Northwest Territories, Nunavut, Ontario, PEI, Quebec, Yukon||$500 000|
The corporation tax rates for small businesses at the federal and provincial levels that apply to companies claiming the small business deduction are listed below. The federal effective corporate tax rate for private corporations under Canadian control that qualify for the small business deduction is 9 percent.
|Newfoundland & Labrador||3%|
|Prince Edward Island||3%|
Capital Gains Corporate Tax Rate Canada
Any profit realized from the sale of capital or passive assets, such as companies, stocks, shares, goodwill, and real estate, is referred to as a capital gain. A corporation’s declared taxable income must include capital gains. However, a corporation only needs to include half (50%) of its capital gains in its revenue. The capital gains inclusion rate is this.
The corporate tax rate on capital gains is equal to 50% of the tax rate on investment earnings since only 50% of a capital gain is taxable. This is a high tax rate, so any firm that might later realize a capital gain should consult a tax accountant to fully comprehend the tax ramifications of all transactions and gains.
Corporations can also use capital losses to outweigh capital gains.
Corporate Investment Income Tax Rate Canada
In Canada, companies can get investment income in a variety of ways. Investment income mostly comprises of property-related income, such as rent, interest, dividends, capital gains, and royalties. Investment income, also referred to as passive income, is unrelated to a corporation’s active main business revenue. Investment income may represent a sizeable amount of a company’s overall income, depending on the size of the corporation and its operations.
New regulations governing the company tax rate on investment income went into effect in January 2019. The tax rate on your corporation’s ordinary business revenue rises if your passive investment income exceeds the current threshold of $50,000 per year. With this new legislation, it is intended that corporate profits go directly into the business rather than being used to increase passive income. Now, CPCCs are dissuaded from employing specific corporate structures to generate sizable investment income and do not have an incentive to raise their passive investment revenues in order to maintain a low corporate income tax rate.
The corporate investment income tax rates in Canada are as follows:
|Region||Investment Income Tax Rate 2020|
|Newfoundland & Labrador||15%|
|Prince Edward Island||16%|
Corporate Tax Rate Calculator Canada
Navigating provincial and federal legislation and having a thorough understanding of your corporation’s finances are necessary for determining your corporate tax rate. Numerous calculators for company tax rates that are available commercially are unable to produce precise estimations and can lead to even more uncertainty.
The only option to guarantee complete accuracy for your company tax rate calculation is to work with a professional CPA (Chartered Professional Accountant). Severe fines that have an impact on your bottom line can result from a single inaccuracy, missed document, or calculation error. When calculating, filing, and planning your corporation income tax, always seek the advice of a corporate tax accountant.
USA vs. Canada: Corporate Tax Rate
In many ways, comparing the corporation tax rate in Canada to the USA is like comparing apples and oranges. In the end, the tax rates in many nations are relatively comparable.
There are two components to Canada’s corporation tax rates: the federal (15%) and the provincial (ranging from 0 percent to 16 percent depending on the classification). The typical corporate tax rate for Canadian businesses is between 26.5 percent and 31 percent.
On the other side, there are more sections in the American corporate tax rates. First off, there is a federal company tax rate of 21%. Then, the rates levied by the state and local governments range from 0% to 12%. Other corporation tax rates are also available, and they vary from state to state and locality to locality. When determining its federal taxable income, an American corporation may deduct its state and local income tax expenses, which typically yields a net effective rate of about 27%.
In general, the corporation tax rate in Canada and the USA are relatively comparable. You must calculate your corporate tax rate differently in each country if your firm has operations in both.