Understanding the corporate tax rates and the small business tax rates in Canada is no easy task. There are several factors to consider when determining what you owe.
As a Canadian business owner, it is your responsibility to know the Federal corporate tax rate, the applicable provincial corporate tax rate, and any exemptions or deductions that may apply.
To help you in the process, we’ve put together this detailed article containing essential information about the Canada corporate tax rate and how they apply to your small business.
Based on the Income Tax Act, the Federal corporate tax rate starts at 38%. This rate has an offsetting 10% Federal income tax abatement and an additional 13% general tax reduction. All of this places the net corporate tax rate at 15%.
This tax rate applies to general corporations, which are corporations that are not Canadian-controlled private corporations (CCPCs). Typically, these corporations are public companies with resident subsidiaries in Canada and private companies controlled by foreigners or non-residents.
Several factors determine how much corporate tax your business must pay in Canada. The corporate tax rate in Canada depends on which province your business is located in, the size of the company (how much revenue is earned), and income sources, that is, whether or not the business earns active income or passive income.
Note that active income is income from your ordinary business activities, excluding amounts generated from passive income, a specified investment business, or a personal services business. Investment income is income generated from interest, dividends, rent, and capital gains.
Here is a breakdown of the general corporate income tax rate by province:
|2023 General Corporate Tax Rates|
|Prince Edward Island||16%|
|Newfoundland & Labrador||15%|
Small businesses that are located in Canada pay different tax rates based on how the business is set up and how much revenue the business earns.
A Canadian small business is defined as having less than $500,000 in annual taxable income.
Canadian-controlled private corporations (CCPCs) can use the Federal small business deduction (SBD) to reduce the corporate income tax rate on the company’s active business income with all primarily activities being carried on in Canada. A CCPC is a corporation owned by either Canadian residents or a company controlled by Canadian residents. To be defined as a CCPC, your corporation must be incorporated in Canada, a private corporation, and it is not publicly traded on any stock exchange.
The Federal small business deduction was designed with small businesses in mind to reduce the overall corporate income tax liability. In most provinces and territories, the maximum limit for preferential tax treatment is $500,000 in taxable income. This is also known as the small business limit for the corporation.
The preferential tax treatment of small business deduction helps small to medium enterprises, startups, and other smaller companies fulfill their tax obligations and provide valuable incentives to bigger, larger corporations.
The following chart shows the Federal and each province’s small business tax rates applicable to businesses claiming the SBD small business deduction. For CCPCs eligible for preferential tax treatment to claim the SBD small business deduction, the Federal corporate tax rate is 9%.
|Business Limit Threshold||2023 Small Business Tax Rate (CCPC)|
|Prince Edward Island||$500,000||1%|
|Newfoundland & Labrador||$500,000||3%|
Not all provinces have the same corporate income tax rate. In some instances, there is a dual tax rate.
The dual tax rate consists of a lower rate and a higher rate. The lower rate is applied to income eligible for the Federal small business deduction (SBD), which is the income that meets or falls below the established Federal business limit threshold. The higher tax rate applies to all other income.
Here is an example of what this might look like:
ABC Company has a permanent business in Ontario and has a taxable income of $600,000. All income is earned from ordinary business activities carried on in Canada.
The small business deduction tax rate in Ontario is 3.2% and 9% at the Federal level, providing a combined total of 12.2%.
The General Corporate Tax Rate in Ontario is 11.5% and 15% at the Federal level, providing a combined total of 26.5%.
ABC Company would calculate corporate income taxes on the first $500,000 income (i.e. small business limit) using the Small Business Tax Rate of 12.2%. This equals $61,000. ABC Company would then calculate the corporate income taxes on the remaining $100,000 income using the General Corporate Tax Rate of 26.5%. This equals $26,500. The combined corporate income taxes payable are $61,000 plus $26,500 for a total of $87,500.
The following chart shows each province’s combined Federal and provincial corporate income tax rates on income eligible for Small Business Tax Rate and income subject to General Corporate Tax Rate.
|Province/Territory||2023 Small Business Tax Rate (Lower Rate)||2023 General Corporate Tax Rate (Higher Rate)|
|Prince Edward Island||10%||31%|
|Newfoundland & Labrador||12%||30%|
In Canada, investment income is income generated primarily from investment assets, including interest, dividends, rentals, and capital gains. It is often considered passive income as it is not directly tied to or related to the corporation’s primary business income.
In 2019, the Canada Revenue Agency implemented changes to the way corporate investment income is taxed. These new rules dictate that if passive income crosses a $50,000 threshold in the tax year, the corporate tax rate on the corporation’s active business income will increase.
These rules were implemented to encourage businesses to reinvest passive income back into the business rather than let it sit and continue to grow as passive income. CCPCs, under this tax structure, don’t have the incentive to increase passive income if they wish to keep their tax rate at a lower level. In fact, the reduced Small Business Tax Rate is completely phased out if passive income exceeds $150,000. Historically, CCPCs may have invested this income in things like stocks and bonds to preserve assets and increase overall income.
CCPCs are subject to a Federal investment income tax rate of 28% (net of 10% Federal income tax abatement) plus a refundable 10⅔% for a total Federal income tax rate of 38⅔% or 38.70%.
Here is a breakdown of the Corporate Investment Tax Rates in Canada:
|2023 Investment Tax Rate|
|Prince Edward Island||16%|
|Newfoundland & Labrador||15%|
A capital gain is earned through the sale of a passive investment asset. Passive investment assets can include shares of businesses, publicly traded stocks, goodwill, land, and other real properties. Capital gains must be declared as part of a corporation’s income.
The good news, however, is that due to the capital gains inclusion rate, only half or 50% of a corporation’s capital gains need to be included in declared income.
Since only 50% of capital gain is subject to taxation, the corporate tax rate on capital gains is equal to 50% of the Investment Income Tax Rate.
If the assets held by the corporation have appreciated substantially in value, this may result in hefty tax liability at the time of sale. Any business with the potential for capital gains should speak with a professional corporate tax accountant to fully understand the implications and how these gains will be taxed.
After capital gains are reported, the business can take advantage of the Capital Dividend Account (CDA) to distribute the non-taxable portion of the capital gain. This is because only 50% of the capital gain is subject to taxation, and the other 50% can be distributed using the CDA on a tax-free basis.
Note that if the sale of assets results in a capital loss, it can be carried back 3 years to offset prior year capital gains and carried forward 20 years on any future capital gains. Capital losses cannot be used to offset ordinary active business income earned.
Here is a look at the Capital Gains Corporate Tax Rates in Canada.
|2023 Capital Gains Corporate Tax Rate|
|Prince Edward Island||8%|
|Newfoundland & Labrador||7.50%|
Ontario has some of the lowest corporate income tax rates in all of Canada (with the exception of taxable capital business limit), making it an appealing province to establish a business operation.
The Ontario basic corporate tax rate is 11.50%. Ontario offers incentives to small businesses by reducing the corporate income tax to 3.20% if they qualify with $500,000 or less in corporation’s taxable income.
The small business deduction is gradually eliminated in Ontario for companies whose total taxable capital employed in Canada exceeded $10 million in the previous year. This deduction is eliminated altogether when the previous tax year’s taxable capital exceeds $15 million. This is known as the taxable capital threshold business limit reduction.
Corporations involved with manufacturing and processing, mining, farming, logging, and fishing may qualify for a different tax credit that will effectively lower the general corporate income tax rate to 10%.
2023 corporate income tax rates in Ontario are as follows:
|Ontario Only||Combined with Federal|
|General Corporate Tax Rate||11.50%||26.50%|
|Small Business Deduction Tax Rate ($500,000 or less)||3.20%||12.20%|
|Investment Income Tax Rate||11.50%||50.20%|
|Capital Gains Corporate Tax Rate||5.75%||25.10%|
British Columbia has two rates of corporate income tax: the general rate and the lower small business deduction tax rate. The current general tax rate is 12%, while only 2% for small businesses. At the provincial level, passive investment income is taxed at the same rate as other sources of income earned in the province.
The significantly lower small business deduction tax rate applies to Canadian-controlled private corporations (CCPC) with active business income eligible for the small business deduction (SBD). However, if the income exceeds $500,000, a portion of the income will be taxed at the general corporate tax rate. For example, if a business earns $580,000, $500,000 will be eligible for the lower small business deduction tax rate, and $80,000 will pay tax at the general corporate tax rate (the higher rate).
The 2023 corporate income tax rates in British Columbia are as follows:
|British Columbia Only||Combined with Federal|
|General Corporate Tax Rate||12%||27%|
|Small Business Deduction Tax Rate ($500,000 or less)||2%||11%|
|Investment Income Tax Rate||12%||50.70%|
|Capital Gains Corporate Tax Rate||6%||25.35%|
Of all the provinces in Canada, Alberta has the lowest corporate income tax rate at just 8%. This is not only the lowest corporate income tax rate in Canada but is among the lowest in North America and competitive with some of the lowest tax rates, even in the United States.
These low tax rates position Alberta as an attractive option for both large corporations and small businesses, with a combined Federal and provincial rate at 23% (15% Federal and 8% provincial) for larger corporations and 11% (9% Federal and 2% provincial) for businesses eligible for small business deduction.
Here is a breakdown of the 2023 corporate income tax rates in the province of Alberta:
|Alberta Only||Combined with Federal|
|General Corporate Tax Rate||8%||23%|
|Small Business Deduction Tax Rate ($500,000 or less)||2%||11%|
|Investment Income Tax Rate||10%||46.70%|
|Capital Gains Corporate Tax Rate||5%||23.35%|
Staying on Top of Your Corporate Taxes in Canada
As you can see, keeping track of and managing federal tax rate and provincial tax rate in Canada can be complicated. This is especially true if you conduct business in more than one province or generate income that exceeds the small business limit.
To stay fully on top of the ever-changing corporate tax rates, it is always best to speak with a trusted tax professional.
Our team at WTC Chartered Professional Accountant can help you with your corporate tax filing, maximize your deductions, and receive any available tax credits. Contact us today to learn more about how we can assist with your corporate taxes!