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Ontario|Tax LawBusiness Taxes 185 Corporations The tax rules for a corporation and its owners are different from other types of businesses. Under the law a corporation is considered a separate legal entity and is required to pay taxes on its net income. A corporation's income is the profit that remains after deducting business expenses and before paying out dividends to its shareholders.
- Tax filing requirements
As a separate legal entity, a corporation is required to file a separate tax return within six months of the end of its fiscal period, even if no taxes are owed. Corporations in Ontario are required to file two tax returns, one for the federal government and one for the provincial government. Generally, a corporation is also required to report and remit taxes in monthly installments, by the end of each month.
- Rates of tax
The combined provincial and federal tax rates for a corporation range from about 25% to 46%. Generally, Canadian controlled private corporations carrying on an active business are taxed at the lowest rate on the first $200,000 of income. To find out if your business qualifies as a small Canadian controlled private corporation, call a tax lawyer or consult an accountant.
- Tax implications of receiving profit or drawing a salary
If you want to draw money from your corporation, there are different tax consequences depending on how you are paid. Generally, there are two ways to get paid by a corporation. You can usually draw a salary as an employee of the corporation, or, if you are a shareholder, you can receive dividends.
- Reduced tax rate for small businesses
If you draw a salary, the amount of your salary is considered an expense of the corporation. This means that the corporation can deduct the amount of your salary from its income before taxes are applied. If you draw a salary, you may also be able to reduce the amount of tax you pay personally by making RRSP deductions and deducting the contributions from income.
- Paying out dividends
If you own shares in a private corporation, the other way to draw money is to receive dividends. The overall tax implications of paying dividends instead of a salary will depend on the applicable corporate tax rate and your available tax credits and deductions.
One of the differences between salaries and dividends for business tax purposes is that a corporation can deduct salaries as an expense before taxes but pays dividends from after tax income. If you receive dividends, you will not be able to use the RRSP deduction to reduce your taxable income. However, because of the dividend tax credit you personally pay less tax on dividend income than if you were paid a salary.
For additional information about tax rules for corporations, you should consult a tax lawyer.
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