Canada imposes federal corporate and personal income tax on its residents, and on non-residents who carry on business in Canada, are employed in Canada or sell property situated in Canada. Canadian resident individuals and corporations are taxable on their worldwide income, including capital gains. Non-residents of Canada are generally only taxable on their income from Canadian activities and investments, including gains on the sale of certain types of Canadian investments.
All Canada's ten provinces and its northern territories (considered provinces for income tax purposes) also levy income taxes on corporations and individuals residing or carrying on business within the province. Most of the provinces impose a general capital tax on corporations.
Canada also imposes a withholding tax on non-residents who receive dividends, interest, rents, royalties or management fees from Canada. Withholding taxes can also apply to pensions, trust income and commissions paid to non-residents. The Canadian payor of any such amounts is liable for withholding and remitting this tax on behalf of the non-resident recipient.
Canada has entered into tax treaties with numerous countries which provide favourable treatment to residents of those countries. These treaties generally include relief from Canadian taxation on business profits in the absence of a permanent establishment in Canada and a reduction or an elimination of withholding taxes in many situations.
Federal income tax rates are uniform across the country, with various reductions and credits intended to encourage the development of business activity and employment in certain industries of the economy and in certain regions of Canada. Corporations engaged in manufacturing and processing operations may claim a reduction in Canadian federal tax rates on their profits from these activities. Tax incentives are also available to encourage research and development in Canada. Only 75% of capital gains are subject to tax. The provinces establish their own rates of tax and, in some cases, rules for the computation of taxable income. The maximum combined federal and provincial corporate tax rate (including any surtaxes) is in the range of 38% to 46% depending on the provinces where business establishments exist. Combined rates for manufacturing activities range from approximately 25% to 39%.
The federal government also imposes a large corporations tax which is a tax on the capital employed in Canada by a corporation. This capital tax is currently applied at a rate of 0.225%. It is imposed on taxable capital in excess of $10,000,000. Taxable capital is generally the sum of shareholders' equity and long-term or secured debt, less debt and equity investments in other corporations. Large corporations tax applies to Canadian corporations as well as non-resident corporations carrying on business in Canada through a branch. For these foreign branches, the tax is only imposed on that portion of the capital employed in Canada in the year.
Income tax is imposed at graduated rates upon the taxable income of individuals. Residents of Canada must include their worldwide income, whereas non-residents include only their income from carrying on a business or from providing personal services in Canada, plus 75% of certain capital gains on the disposal of Canadian property. The maximum combined federal and provincial rate for individuals is in the range of 44% to 54%, depending on the province of residence.
Non-residents who sojourn in Canada for 183 days or more in a calendar year are deemed to be residents for the entire year and, as such, can be taxed in Canada on their worldwide income. Canada's foreign tax credit rules and the application of tax treaties generally ensure that individuals with dual residence status are not double-taxed.
The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.
While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without first consulting a PricewaterhouseCoopers LLP professional. Should you have any questions concerning the information provided herein or require specific advice, please contact your PricewaterhouseCoopers LLP advisor, or:
David W. Steele PricewaterhouseCoopers LLP 145 King Street West Toronto, Ontario M5H 1V8 Canada
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