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Corporate Tax

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If you're anything like the majority of small business owners, you're probably not too familiar with all the laws and guidelines that must be followed in order to calculate your taxes and file your corporate tax return. The amount of tax that your corporation is required to pay is determined by a number of decisions that must be made throughout the year.

Rates for Corporate Taxes, Payment and Filing

Rates of Federal Corporation Tax

The province in which a corporation is situated and the scale of the enterprise determine the corporate tax rates.

The business's taxable income is subject to a base federal tax rate of 38%. However, there are a number of deductions for which a business may qualify, such as the following:

  • If a company is a Canadian Controlled Private Corporation (CCPC), it can benefit from the small business deduction, which is a 10.5% tax rate on income up to $500,000.
  • The federal tax abatement lowers the tax rate by 10% on income earned in a Canadian province or territory. Income received from sources outside of Canada or income qualified for the small business deduction is not subject to the abatement.
  • The manufacturing and processing profits (MPPD) deduction is available to businesses whose gross revenue from manufacturing and/or processing accounts for at least 10% of their total revenue. For income that isn't qualified for the small business deduction, the MPPD rate is 13%.

    • Corporate Tax Rates by Province

    This page lists the general tax rates as well as the small business tax rates for every province, with the exception of Alberta and Quebec.

    There are no corporation tax collection agreements between the CRA and Alberta or Quebec. You can find the tax rates for those provinces on the websites of their respective governments.

    Reporting Corporation Taxes

  • With very few exceptions, every corporation that does business in Canada must file a corporate tax return, regardless of whether it is profitable or not. Nonprofits and tax-exempt corporations are included in this.
  • Corporate income tax is due on both the federal and provincial levels for any corporation that conducts business in Canada, has a taxable capital gain, or sells Canadian real estate.
  • Within six months following the conclusion of the corporation's tax year, tax returns must be filed. A corporation can choose any date for its year end, in contrast to personal tax returns, which have a year end on December 31.
  • With the exception of Alberta and Quebec, the T2 return is also used for filing on a provincial and territorial level. The province returns need to be filed independently because these provinces and the CRA do not have corporation tax collection agreements.

    • To avoid late filing penalties, it's critical to file on time.

    Paying Business Taxes

    Corporate taxes are generally paid in either monthly or quarterly installments throughout the year, with the exception of newly formed corporations or corporations with annual tax liabilities of less than $3,000. Worksheets from the CRA can be used to calculate installment payment amounts. Late payments will incur penalties.

    Almost every payment method is accepted by the CRA, including payments made through your financial institution.

    Frequently Asked Questions by Small Business Owners

    Dividends vs. Salaries: How Should I Pay Myself?

    Paying yourself a salary lowers the net income of the company because it is an expense. For you, the pay is personal employment income, and a T4 slip will be provided. In order to remit the payment to the CRA along with the company's CPP and EI contributions, your company must first register a payroll account with the CRA and withhold CPP, EI (if applicable), and tax from the payment.

    Dividends do not count as business expenses and have no bearing on the amount of income or corporate taxes due by the business. The company's post-tax income is used to pay them. A dividend tax credit will lower your personal tax liability because the dividend amount has already been taxed. T5s will be given to you and any other shareholders who received dividends.

    Benefits of giving yourself a salary include:

  • Where as a dividend prevents you from contributing to your RRSP, a salary does.
  • Your CPP contributions will boost the amount of CPP you receive when you're sixty-five to sixty-six years old. Conversely, you now have less cash on hand.
  • When it comes time to file, you won't have to deal with an awkward tax scenario because income tax is deducted from your pay.

    • The benefits of making dividend payments to yourself:

  • Dividends will achieve this goal if optimising your cash now is more important than optimising it later.
  • Less red tape will need to be completed, such as opening a payroll account with the CRA and sending in regular remittances. This is probably most helpful when you are first starting out as a corporation and are just attempting to expand.
  • There is only one opportunity to be assessed a late filing penalty because T5s are only issued at the end of the year.

    • Which way of paying oneself has a lower total tax—personal and corporate?

    Sadly, there isn't a universally applicable response to this query. This is something that a tax expert needs to look into on an individual basis.

    What Separates Subcontractors from Employees?

    A relationship with a subcontractor has various benefits:

  • Payroll remittances for CPP, EI, and income tax are among the payroll-related duties and documentation that come with having employees, but they are not your entire responsibility as the business owner.
  • Because it is exempt from paying into insurance, pension, EI, CPP, or other plans, the company's expenses are lower and its cash flow is higher.
  • As in a seasonal business, subcontractors are not obligated to provide work when there is a decrease in work compared to employees. Subcontractors are able to deduct any legitimate business expenses they incur because they are effectively self-employed.

    • It's not as easy as just calling someone a subcontractor, even though there might be financial benefits for you and your subcontractors. If the CRA conducts an investigation, it will examine every aspect of the working relationship and take the relationship's purpose into account in order to determine whether there is proof of an employer-employee relationship. Should it uncover such proof, there may be hefty fines and payments to make.

    Therefore, to make sure you stay out of trouble—even though it might be tempting to claim someone is a subcontractor—it's advisable to read the Government of Canada website's "Employee or Self-employed?" guide.

    My Shareholder Loan Account: What Is It?

    You might have wondered what accounts labelled "Shareholder Loan," "Due from Shareholder," or "Due to Shareholder" on your company's balance sheet meant.

    To put it plainly, if any of these accounts are located on the asset side of your balance sheet, it means you owe your business money. For instance, it's possible that you took money out of the business for your own use.

    It represents money that your business owes you if it is listed on the liability side of your balance sheet. It's possible that you have contributed money to your business or covered some of its costs out of pocket.

    What then is the issue?

    There isn't a problem if it relates to liability. With no tax repercussions, you can simply withdraw the funds whenever you want.

    However, there might be issues if it's related to the assets. Should you fail to pay back the remaining amount within a year, the CRA may consider it as personal income, and you will be responsible for paying taxes on that amount. Even worse, your business won't be able to take that much out. In other words, that amount is subject to double taxation.

    You can either repay the money within a year or declare it as a dividend or salary to avoid this from happening. However, don't believe that you can pay it back before the end of the year and then take it out again. Being aware of this, the CRA will handle it as if it hasn't been paid back.

    Have You Developed Tax Brain Fog Yet? We're Able to Help.

    When you work with us, all of the corporate tax concerns are taken care of for you. We will inform you of the things you're doing correctly and any actions you may be taking that may result in issues with the CRA or in paying more corporation tax than is necessary.

    Additionally, if you choose one of our bookkeeping packages, we can serve as your year-round advisor, greatly simplifying and relieving the stress out of your life.

    Get in touch with us now to begin breathing easier.