A guide to Canadian corporate tax rates

While corporations are given the freedom to do business in the country, it comes with it many responsibilities under the law – which involves paying taxes.

In this article, we’ll break down the important guidelines that your business should know about the Canadian corporate tax rate, including the filing of returns and some of the reductions.

What is corporate tax in Canada?

Generally, corporate taxes are levied on corporations that do business in Canada, or those that derive their income in Canada.

It is a combination of federal rates and provincial or territorial rates, depending on the business location.

Canada’s income tax laws, the federal Income Tax Act in particular, govern Canadian corporate tax rates, which includes the filing of returns.

Resident or non-resident corporations

For the purposes of taxation and other laws, common law has classified corporations in Canada into two:

• resident corporations:
  • incorporated under Canadian laws; or
  • incorporated outside Canada, but its central management and control is exercised in Canada
• non-resident:
  • incorporated outside Canada; or
  • resident of another country

These classifications will also help you decide if you’re governed by Canada’s tax laws or not. If in doubt, it’s better to consult a corporate tax lawyer near your area.

Corporation income tax return

Whether you’re a resident or non-resident corporation, knowing if you have to file your corporate income tax return is important.

Corporate income taxes are filed using the T2 form. Its filing will depend on whether your business is a resident or a non-resident corporation:

For resident corporations:

These corporations must file a T2 return every year, even if there is no tax payable.

For T2 return purposes, resident corporations include: non-profit organizations, tax-exempt corporations, and inactive corporations.

Crown corporations, Hutterite colonies, and registered charities are exempt from filing T2 returns.

For non-resident corporations:

These corporations would only need to file a T2 return if it fulfils one of these conditions:

• • carried on a business in Canada
  • had a taxable capital gain
  • disposed a taxable property in Canada

Once you’ve completed your T2 return, what’s next? Find out how and where to pay corporate income tax.

Filing corporate tax returns can be done online. Watch this video to learn more:

Learn more about Canadian corporate tax rates from a lawyer in your area. If you’re in Montréal, contact the best corporate tax lawyers in Québec as ranked by Lexpert.

What is the Canadian corporate tax rate?

The Canadian corporate tax rate that applies to an entity will depend on several factors, such as:

• type of income earned
• status of the corporation
• province or territory where the income was earned

There are two Canadian corporate tax rates:

1. the federal rate
2. the provincial and territorial rate

Corporate tax rate at the federal level applies in addition to the provincial or territorial corporate tax rates.

Federal corporate tax rate

The federal corporate tax rate in Canada is generally at 38%. This is also called the Part 1 tax rate, which covers your business’s income taxes.

Your 38% corporate tax rate can be reduced to 28% if you’re eligible for federal tax abatement. This abatement applies only to income that your business earned inside Canada, and not outside the country. Federal tax abatement is 10% of the taxable income earned in the year, in a province or territory in Canada.

There can be a further deduction of 13% called the general tax reduction. This applies to your business’s corporate income earned in a Canadian province or territory, but it must not be subject to other preferential tax treatment.

After federal tax abatement and general tax reduction, your 38% federal corporate tax rate in Canada will result at a rate of 15%.

This 15% rate can be further reduced if your business is eligible for a small business deduction (SBD), as discussed further below.

Provincial and territorial corporate tax rate

In addition to the Canadian corporate tax rate at the federal level, your business will also have to pay the applicable provincial or territorial corporate taxes.

The rate will vary from each province and territory. These taxes are not deductible for federal corporate income tax purposes.

The provincial or territorial corporate taxes are further divided into two rates:

• lower rate: applies to the corporate income eligible for the federal SBD
• higher rate: applies to all other corporate income

Note that there may be two higher rates, which depends on your province or territory:

• manufacturing and processing (M&P) income not eligible for the federal SBD
• non-M&P income not eligible for the federal SBD

Here’s a summary of the Canadian corporate tax rate for the provincial and territorial rates:

Other Canadian tax rates for corporations

Aside from the federal, provincial, and territorial tax rates for your corporation’s income, you may also be subject to other tax rates, such as:

• investment income
• capital gains

Are there ways to reduce the corporate tax in Canada?

As discussed above, the Canadian corporate tax rate can be reduced to 15% after federal tax abatement and general tax reduction.

There are other deductions that can be used to further reduce the 15% federal corporate tax rate. One of these deductions is the SBD.

The goal of these deductions is to lessen the impact of taxation on your business by reducing your taxable income. This will then result in a smaller tax payable on your end.

Small business deductions

Your business may be eligible for SBD of up to $500,000 ($600,000 in Saskatchewan). After SBD, the 15% federal corporate tax rate can result in a net tax rate of 9%.

SBD applies if your business is considered a Canadian-controlled private corporation (CCPC).

To be considered as a CCPC, your business must:

• be a private corporation
• be a resident corporation in Canada until the end of the tax year
• not be directly or indirectly controlled by:
  • non-resident persons
  • public corporations
  • a resident Canadian corporation that lists its shares on a designated stock exchange outside Canada
• not have listed any class of its shares of capital stock on a designated stock exchange

Even if shares are owned by the above-mentioned persons or corporations, they must not have sufficient shares to control the business.

Got more questions about the Canadian corporate tax rate? Check out our list of Lexpert-ranked best corporate tax lawyers in Canada.

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