Taxation in Canada: An Overview Corporate Income Tax - PricewaterhouseCoopers LLP
Corporations are classified for Canadian tax purposes as:
- resident or non-resident corporations;
- public or private corporations.
A resident corporation is one whose central management and control is in Canada, but a corporation is deemed to be resident if:
- it was incorporated in Canada after April 26, 1965;
- it was incorporated in Canada at an earlier date and was resident or carried on business in Canada at any time after April 26, 1965.
The distinction between resident and non-resident corporations is important in that resident corporations are subject to tax on their worldwide income, whereas non-resident corporations are subject to tax only on their Canadian-source income. This would include income from carrying on a business in Canada and capital gains arising on the disposition of most types of Canadian property and assets.
Resident corporations are classified as either public or private corporations. Public corporations are those whose shares are listed on a Canadian stock exchange and the subsidiaries of such corporations. Other corporations, including subsidiaries of foreign public corporations, are classified as private corporations.
Private corporations that are at least 50% controlled by Canadians may be eligible for small business tax credits or provincial tax exempt status.
Resident corporations currently pay federal income tax on their worldwide income at the general rate of 38%. Non-resident corporations are subject to the same rates of tax on income earned in Canada. There are abatements of 10% for income earned in a province and 7% for profits attributable to Canadian manufacturing and processing operations. A surtax of 4% of federal tax otherwise payable is also imposed. Thus, the maximum federal rate on Canadian income is 29.12%. Canadian-controlled private corporations receive an additional abatement (small business tax credit) which reduces the federal income tax rate by 16% on up to $200,000 of annual taxable income from an active business.
Provincial income tax applies to corporations carrying on business in one or more of Canada's provinces or northern territories. This tax is applied to income earned in each province with business income allocated on a formula basis that generally utilises salaries paid and gross revenues attributed to a corporation's permanent establishments. General provincial income tax rates currently range from just over 9% to 17%, with various reductions for manufacturing, farming, fishing and mining. All provinces offer tax credits that can reduce provincial rates on active business income of qualifying Canadian-controlled private corporations. Some have "tax holidays" for certain small businesses.
The maximum combined federal and provincial tax rate for corporations is in the range of 38% to 46%, depending on the province(s) where business establishments exist. Combined rates for manufacturing activities range from approximately 25% to 39%.
The Canadian branch of a foreign corporation is generally only subject to tax on earnings from its activities in Canada, including gains on the sale of certain types of Canadian investments. The tax rates are the same as those that apply to the taxable income of private corporations resident in Canada. In addition, a branch must pay a branch tax on its after-tax branch profits minus an investment allowance. The investment allowance deduction can eliminate the branch tax where profits are invested in the Canadian business. The branch tax can apply at a 25% rate whether or not the profits are distributed. This tax rate is often reduced (or the tax eliminated) by applicable tax treaty, usually to the same rate as the treaty rate for withholding tax on dividends.
Various corporations are subject to special refundable tax rules. All private corporations, and public corporations under the control of an individual or related group of individuals, are eligible for the refund of the full amount of a 33-1\3% tax imposed on dividends received from other Canadian corporations. Exempt from this 33-1/3% tax are most dividends received from controlled corporations or from other corporations in which there is a 10% or greater holding. In addition, Canadian-controlled private corporations add to their refundable tax account the portion of federal tax imposed on investment income. Refundable tax is recovered by corporations on the basis of $1 for every $3 of taxable dividends paid to shareholders.
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
For further information on taxation in Canada, enter a text search "PricewaterhouseCoopers" and "Canada" and "Mondaq Business Briefing".
Click Contact Link
PricewaterhouseCoopers LLP is a Canadian member firm of PricewaterhouseCoopers International Limited, an English company limited by guarantee.