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. 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 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%. For corporations that qualify as Canadian-controlled private corporations (CCPCs) claiming the small business deduction, the small business net tax rate is 9%.
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%. 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 and continues for 2021.
To find out if your business qualifies as a small Canadian-controlled private corporation, contact a tax lawyer or an accountant.
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 general information, contact Canada Revenue Agency.
For legal advice and assistance with tax planning, a CRA tax dispute, or other tax issues, contact Tax Chambers LLP
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