Running a corporation in Canada has its benefits and responsibilities. One of these benefits is to earn profit from its business activities, which also involves paying taxes under the law.
Managers and members of corporations are expected know about the Canadian tax laws and its implications in their business. One of these is the corporate tax on capital gains, as will be discussed in this article.
What is corporate tax in Canada?
All individuals and corporations should follow Canada’s taxation laws. The tax treatment between them will differ, such as its tax rates and other tax liabilities.
The Canadian tax law is primarily the federal Income Tax Act (ITA) and its Regulations, which is implemented by the Canada Revenue Agency (CRA).
The ITA is in addition to the provincial and territorial statutes that apply to persons and corporations of that province or territory.
Corporate income taxation in Canada
To learn about the corporate tax on capital gains, it’s important for corporations and businesses to understand the general corporate taxation in Canada.
Under Canada’s corporate taxation, a corporation’s income tax is computed as follows:
Federal tax rate:
- The basic rate (Part 1 tax): 38%
- Reduced by federal tax abatement (when applicable) of 10%
- Less by general tax reduction of 13% on qualified income
- Net tax rate of 15%
- Canadian-controlled private corporations (CCPCs) can claim a small business deduction (SBD) for a net tax rate of 9%
Provincial and territorial corporate tax rate:
- Higher rate: applies to all corporate income, not subject to the lower rate
- Lower rate: applies to corporate income eligible for the federal SBD
What is corporate capital gains tax?
Aside from the corporate income tax that businesses and companies are liable for under the law, they are also liable for Canada’s corporate tax on capital gains.
What is capital gains tax
When an individual or a corporation makes a capital gain (also called profit) after selling a capital asset (also called passive asset or capital property), capital gains tax must be paid. This includes assets considered to have been sold.
When selling capital assets, the seller can either have a capital gain or a capital loss:
- capital gain: when capital asset is sold for more than its adjusted cost base, plus outlays and expenses incurred by the seller
- capital loss: when capital asset is sold for less than its adjusted cost base, plus outlays and expenses incurred by the seller
What is ACB
The adjusted cost base (ACB) refers to the cost of the capital asset when the seller originally bought it.
ACB also includes:
- expenses when the asset was acquired
- commissions
- legal fees
- other costs for its improvements
ACB does not include the costs for maintenance and repair of the said asset.
The capital assets that are subject to corporate tax on capital gains include:
- real properties, such as land and buildings
- personal properties, such as business equipment
- shares, stocks, and bonds
- personal use properties
- goodwill
Learn more about corporate tax on capital gains in Canada by watching this video:
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Who is covered by capital gains tax
Resident corporations are governed by Canada’s taxation laws on their income, whether from sources in or out of Canada. This also means that they’re covered by Canada’s corporate tax on capital gains.
As for non-resident corporations, they’re also covered by corporate tax on capital gains if they sell a taxable Canadian property or if they realized a taxable capital gain.
How to calculate corporate tax on capital gains
First, there are certain rules under Canadian taxation laws to consider that will help in calculating corporate tax on capital gains:
- taxes are paid only on realized capital gains: taxes must be paid only when capital gains are realized, such as when capital asset was already sold, and the capital gains are already received
- capital gains tax is based on profits: capital gains tax is only based on the profit (thus, the word “gains”) and not on the total selling price of capital asset
- no tax if there are losses: if there are no profits realized during the sale of capital asset (or when there’s capital loss), no capital gains tax will be paid
- capital gains inclusion rate: only half (or 50%) of the total capital gains realized by the corporation is considered when calculating capital gains tax
In other words, the corporate tax on capital gains is 50% of the realized capital gains of the corporation.
Next, the computation of corporate tax on capital gains can be done as follows:
- Amount spent on purchasing the capital asset + outlays and expenses = ACB
- Amount that the capital asset was sold for – ACB = capital gains
- 50% of the capital gains = taxable capital gains
- Taxable capital gains will be added to the total income of the corporation and will be taxed according to the ordinary income rates
- Capital losses can be used to offset the corporate tax on capital gains
If in the current year there are excess capital losses over the taxable capital gains, it can be carried over to the next years or in the previous three (3) years.
What rules apply in filing corporate tax on capital gains in Canada?
There are several rules that apply to filing corporate tax returns in Canada, such as how to do the filing itself and when must it be filed.
Under the ITA, all resident corporations must file their corporate income tax return, called the T2 return, within six (6) months of the end of each tax year.
Non-resident corporations must also file a T2 return, if they sold a taxable Canadian property or if it has a taxable capital gain.
Got other questions about the corporate tax on capital gains in Canada? Contact any of the Lexpert-ranked best corporate tax lawyers in Canada.