Area of Law: Tax Law
Answer # 192
CorporationsRegion: Ontario Answer # 192
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.
How is taxable income determined?
A corporation’s income is the profit that remains after deducting business expenses and before paying out dividends to its shareholders. Specifically, a corporation’s taxable income is equal to revenue less:
- current expenditures, which are deducted in the year in which they are paid, including wages, fees, rent, and interest on borrowings;
- purchases of capital goods, such as buildings and machinery; and
- business losses, which are deducted for past years or in subsequent years.
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 are required to file a T2 Corporation Income Tax Return with the Canada Revenue Agency (CRA). There is no separate return required to be filed with the Ontario Government. Depending on the amount of income the business makes, a corporation may also be required to report and remit taxes in monthly installments, by the end of each month.
Rates of tax
Corporate income tax is levied by both the federal and provincial governments. The effective rate of general federal tax is 15%.
Small business deduction (SBD)
Small Canadian-controlled private corporations (CCPCs) that qualify to claim the small business deduction are taxed at a corporate income tax rate that is lower than that for other corporations.
A CCPC’s small business deduction depends on both the CCPC’s small business limit and income from an active business carried on in Canada. The deduction is calculated by multiplying its SBD rate by the lesser of its:
- income for the year from an active business carried on in Canada, excluding certain income and exceeding certain losses;
- taxable income for the year; and
- business limit for the year
SBD rates are as follows:
- CCPCs with taxable capital below $10 million: a tax rate of 9.0% is applied on the first $500,000 of taxable income, which is the small business limit.
- CCPCs with taxable capital between $10 million and $15 million: the small business limit of $500,000 in taxable income is reduced at the rate of $1 per $10 of capital exceeding $10 million.
- CCPCs with taxable income exceeding $15 million: do not qualify for the small business deduction.
What is a CCPC?
For information on whether your corporation qualifies as a Canadian-controlled private corporations (CCPC), contact a tax lawyer or an accountant, or visit canada.ca for a full list of requirements.
Generally, provinces and territories have two rates of income tax: a lower rate which applies to the income eligible for the federal small business deduction, and a higher rate, which applies to all other income.
The general higher rate imposed by Ontario is currently 11.5%. For qualifying CCPCs, the Ontario small business deduction (SBD) has reduced the lower Ontario corporate income tax rate on the first $500,000 of active business income of CCPCs to 3.2%. This occurred beginning January 1, 2020.
For more information on the Ontario small business deduction and corporate income tax, contact a tax lawyer or an accountant, or visit the Ministry of Finance.
Tax implications of receiving dividends 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 draw a salary as an employee of the corporation; or, if you are a shareholder, you can receive dividends.
1. Employment income
If you are paid by the corporation as an employee, the usual deductions for employees will be made from your paycheques and remitted to CRA. These include deductions for income tax and Employment Insurance premiums. You will be taxed according to your personal tax rate. If you draw a salary, you may also be able to reduce the amount of tax you pay personally by making RRSP contributions and deducting the contributions from income.
From the corporation’s standpoint, the employment income can be deducted as an expense from business income before taxes are applied.
If you own shares in a private corporation, the other way to draw money is to receive dividends. 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.
The overall tax implications of paying dividends for the corporation will depend on the applicable corporate tax rate. One of the differences between salaries and dividends is that a corporation can deduct salaries as an expense before taxes but pays dividends from after tax income.
A corporation may also be required to collect and remit other types of tax. The most common are HST and payroll tax.
As opposed to sole proprietorships and partnerships, corporations can choose a fiscal period other than a calendar year for calculating and paying taxes. Further, corporations are able to defer taxes this way.
For legal advice and assistance with tax planning, a CRA tax dispute, or other tax issues, contact Tax Chambers LLP
You now haveoptions: