An Overview of Taxation in Canada: Corporate Capital Taxes - PricewaterhouseCoopers LLP
The federal government imposes a tax on capital employed in Canada by certain larger corporations. This "large corporations tax", or "LCT", is somewhat akin to a corporate minimum tax.
The LCT currently applies at a rate of 0.225% of a corporation's capital after deducting any investment allowance and an annual "capital deduction" of up to $10,000,000. Included in a corporation's capital are:
capital stock, retained earnings (less any deficit);
reserves unless deducted in computation of taxable income;
loans and advances payable;
indebtedness represented by bonds, debentures, mortgages and similar obligations;
declared but unpaid dividends.
In computing the LCT base, there may be deducted an investment allowance - the aggregate of the carrying values of the corporation's investment in the stock or debt of other corporations. The LCT base is also reduced by an annual capital deduction of $10,000,000. However, this deduction must be shared among related corporations.
The LCT is not deductible in computing income for income tax purposes. It is reduced by the 4% federal corporate surtax liability on Canadian-source income. Any unused Canadian surtax liability can be applied to reduce LCT for the previous three and next seven years.
The annual LCT return filing, as well as any monthly instalments and balance due provisions have been integrated with the payment and return requirements for federal corporate income tax.
For non-resident corporations carrying on business in Canada through a branch, the LCT is only imposed on that portion of capital employed in Canada in the year.
There are special rules used to compute the capital of financial institutions such as banks, insurance companies and trust or loan corporations. In addition to LCT, most of these corporations will also be subject to a 1.25% federal financial institutions capital tax, where capital employed in Canada exceeds $300,000,000 (1% rate for capital balances between $200 and $300 million). An additional 1% capital tax applies to life insurance companies.
The provinces of British Columbia, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick and Nova impose provincial capital taxes on all corporations with permanent establishments in these provinces, subject to various threshold exemptions. All provinces impose capital taxes on financial institutions such as banks, and trust and loan companies.
The calculation of the tax base or taxable capital often differs from province-to-province and the computation for financial institutions follows special rules not applicable to other corporations.
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
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Toronto, Ontario M5H 1V8
Over the past year, we have watched the Canadian dollar drop relative to its U.S. counterpoint impacting Canadian businesses. U.S. goods and services are now more expensive, U.S. sales make a premium and errors when recording foreign exchange transactions can cost you more money.
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