Are you running a business in Canada? Corporate taxes are not just an additional cost—they are the component of your strategic plan. In 2024, Canadian corporate tax legislation knowledge could make a huge difference to your company’s performance. There are numerous tax rates applied by the federal and provincial governments, limitations on deductions, various kinds of income, and capital gains rules that might complicate tax filing. Still, at the same time, they are full of possibilities for consideration of optimal legal strategies.
This article aims to provide an overview of the corporate tax system in Canada. Corporate tax in Canada is split between federal and provincial taxes with the rates depending on the source of income, type of corporation, and geographical location. Here’s what each category looks like:
1. Federal Corporate Tax Rates
Canada applies a dual corporate tax rate at the federal level:
- Small Business Tax Rate
Small business entities can enjoy a preferential tax rate of 9%. This rate applies to CCPCs on active business income and is limited to CAD 500,000 of business income. To qualify for this category, corporations must meet specific requirements guaranteeing they are privately held and based in Canada.
- General Corporate Tax Rate
For corporations that are more significant, including public corporations and CCPCs with income above the small business threshold, the effective tax rate is 15%. This rate is initially set at 38%, offset by a federal tax credit of 10% and a general tax cut of 13%, giving a net rate of 15%.
2. Corporate Income Tax Rates by Provinces
In Canada, each province and territory has the freedom to set its corporate income tax rates on top of the federal rate. These rates are typically categorized as:
Lower Rate: Applicable to income that can be claimed under the Small Business Deduction (SBD).
Higher Rate: Applicable to all other forms of income as well.
For instance, the general corporate tax rate in Ontario is 11.5% while a small corporation can pay as low as 3.2% provided it meets certain conditions.
Provincial corporate tax rates vary significantly:
- Ontario: 11.5% general rate while the CCPCs would be subjected to a 3.2% tax rate.
- British Columbia: 12% general rate and 2% lower rate.
- Quebec and Alberta: These provinces decide their corporate tax regimes independently of CRA, so the rates vary and can have other subtleties.
| 2024 Corporate Income Tax Rates | ||||
| Active Business Income | ||||
| General | Small Business (CCPC) | Business Income | Investment Income (CCPC) | |
| Federal | 15% | 9% | $500,000 | 38.7% |
| Alberta | 8% | 2% | $500,000 | 8% |
| Ontario | 11.5% | 3.2% | $500,000 | 11.5% |
| Quebec | 11% | 11.5% | $500,000 | 11.5% |
| Newfoundland & Labrador | 15% | 2.5% | $500,000 | 15% |
| Nova Scotia | 14% | 2.5% | $500,000 | 14% |
| Yukon | 12% | zero | $500,000 | 12% |
| Prince Edward Island | 16% | 16% | $500,000 | 16% |
3. Small Business Deduction (SBD)
The Small Business Deduction (SBD) is one of the most effective ways to minimize taxes for CCPCs. The SBD enables the reduction of the tax rate on the first CAD 500,000 of active business income, ensuring that small and growing businesses remain viable.
Income Threshold: The deduction is gradually reduced as the business’s taxable capital increases and is completely removed when it reaches CAD 15 million.
Reduced Rates by Province: Some provinces adhere to the federal SBD limit; however, there are other provinces like Saskatchewan and Manitoba, which have recently altered it.
Note: Provinces may change small business limits and deductions depending on the state of the economy.
Different Income Sources and Their Taxation
It is important to note that not all corporate income is taxed in the same manner. Understanding the breakdown of how different income types are treated helps businesses plan accordingly:
1. Active Business Income:
Active business income includes income derived from the business’s principal activities, for instance, the sale of goods, sales of services, or any other income that is directly attributable to the business’s operations. From the context of CCPCs, an active business income of up to CAD 500,000 is eligible for the Small Business Deduction (SBD) which offers a concessional tax rate.
- Eligible Income: This is income from ordinary business operations, whereas income from sources such as investments or rent is not included.
- SBD Application: This means that the SBD enables qualifying CCPCs to be taxed at a lower rate, with the rest of the income being taxed at the general corporate tax rate.
2. Capital Gains: Preferential Treatment
Capital gains are the revenues derived from the sale of capital assets which are long-term investments by a corporation like stocks, real estate, and equipment. In Canada, the capital gains have preferential tax treatment with only half of the gains being taxed (referred to as the capital gains inclusion rate).
- Effective Capital Gains Tax Rate: As only the first half of the gain is taxed, the effective tax rate is 50 percent lower than the one that applies to other investment gains.
- Capital Losses: Companies can also utilize capital losses of prior years to reduce their gains or taxable income of the current year.
3. Investment Income: Higher Tax Rate for Passive Income
Investment income refers to the income generated from passive sources such as interest, dividends, royalties, or rents. In Canada, passive income is taxed at a higher corporate tax rate to discourage investment income within CCPCs. The threshold for Small Businesses is that if a CCPC earns over CAD 50,000 in passive income in a year, the corporation’s entitlement to the SBD may be limited or denied, thus increasing the overall taxation. This rule is designed to prevent the use of CCPCs as investment vehicles, which are shielded from taxes.
Key Deductions and Credits to Leverage
Canada offers multiple deductions and credits to reduce corporate tax liability:
1. Credit for Scientific Research and Experimental Development (SR&ED)
The SR&ED program is a key tax credit for corporations in Canada that encourages the funding of research and development by providing refundable tax credits for certain R&D costs. This is especially beneficial to technology-based companies and other start-ups that are in the line of business with innovative products.
2. Capital Cost Allowance (CCA)
There is the Capital Cost Allowance through which businesses can deduct depreciation on capital assets. CCA classes enable corporations to spread the cost of anything from vehicles and machinery, to technology and office furniture, over some time.
3. Investment Tax Credit (ITC)
For investment in clean energy or farming, some of the Canadian provinces offer Investment Tax Credits to help alleviate the tax burden on corporations that focus on either environmental or agricultural sector.
Strategies of Corporation Tax Planning for 2024
However, tax planning is not only about compliance but a lot more than that. Here’s how businesses can optimize their taxes:
1. Income Splitting
Where possible, income can be split among family members or shareholders to lower the corporation’s tax liability through deductions for lower tax brackets.
2. Dividend Sprinkling for CCPCs
Dividends are usually taxed at a lower rate than other income hence the best way that CCPCs use to distribute income to shareholders.
3. Tax Loss Harvesting
Capital losses are even allowed to be claimed against future capital gains, thus offering an escape from future capital gains. Through loss harvesting, large corporations with large capital investments may defer or reduce taxable gains in the long run.
Why Mortgage & Real Estate Professionals Should Understand Corporate Tax
Mortgage brokers, real estate agents, and property investors benefit from corporate tax knowledge as it helps them to advise their clients on the realities and make sound decisions. Using knowledge of corporate tax, the professionals are in a position to advise on the structures of investments, on how to deal with tax on property investments, and on the mortgage products that can meet the long-term financial needs of the clients. This expertise helps to build the trust of clients, increase the perceived value of services, and ultimately lead to success in a competitive environment.
Optimizing Your Corporate Tax Plan with ClearWealth
Managing corporate taxes is a delicate process, but it does not have to be complicated. ClearWealth’s team of professional accountants is always at your service to assist you with understanding the Canadian corporate taxation system accurately and effectively. Whether it is about maximizing deductions or minimizing legal risks, we will take care of it all, so you can solely concentrate on important things– “growing your business”.
Clearwealth can take your tax planning to the next level. If you are interested in making sure your corporate tax approach is as effective as it can be, call us at Phone no. (437) 290-5117 or Email us at info@clearwealth.tax.
