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Business Tax Rates in Canada Explained

Business Tax Rates in Canada Explained

There are just a few basic questions that are relevant to the calculation of business tax rates in Canada for corporations and small businesses.

The most pertinent and commonly asked questions when analyzing business tax rates in Canada and the relevancy to your business are the following:

• How much do general corporations pay in combined federal and provincial taxes?
• How much do small businesses pay in combined federal and provincial taxes?
• How do tax rates apply to both corporations and small businesses if the income is active business income, Manufacturing and Processing (M&P) income, and investment income?
• How much is the small business deduction (SBD) and, relatedly, what is the business income threshold for which this deduction applies?

Below is a brief outline of the business tax rates in Canada:

Business Tax Rates Canada-02

Tax Rate for General Corporations on Active Business Income

General Corporations pay a gross federal rate of 15 percent, after deducting the federal abatement of 10% and a rate reduction of 13 percent.

The provincial rate varies from province to province, from a low of 11.5 percent in Ontario to a high of 16 percent in Nova Scotia and PEI.

Taking Ontario as our benchmark example, general corporations in Ontario pay a combined tax rate of 26.5 percent for active business income, which combines the gross federal rate of 15 percent and the provincial rate of 11.5 percent.


Active business income does not include investment income or income from a personal services business. Income of a corporation earned from a personal services business is not eligible for the general rate reduction and is subject to an additional 5% tax, which increases the federal tax rate on personal services business income to 33%.


 

 Income Tax Rates Earned by a General Corporation on Active Business Income for 2018 and Beyond as of September 30, 2018 (see chart below):

 

Business Tax Rates in Canada - Income Tax Rates Earned by a General Corporation on Active Business Income for 2018 and Beyond as of September 30, 2018

 

Tax Rates for General Corporations on M&P Income:

How much do general corporations pay in combined federal and provincial taxes for M&P income?

General Corporations pay a gross federal rate of 15 percent, after deducting the federal abatement of 10% and M&P deduction of 13 percent.

The provincial rate varies from province to province, from a low of 10 percent in Ontario to a high of 16 percent in Nova Scotia and PEI.

Taking Ontario as our benchmark example, general corporations in Ontario pay a combined tax rate of 25 percent on M&P income, which combines the gross federal rate of 15 percent and the provincial rate of 10 percent.

Tax Rates for General Corporations on Investment Income

How much do general corporations pay in combined federal and provincial taxes for Investment Income?

General Corporations pay a gross federal rate of 15 percent, after deducting the federal abatement of 10% and rate reduction of 13 percent.

The provincial rate varies from province to province, from a low of 11.5 percent in Ontario to a high of 16 percent in Nova Scotia and PEI.

Taking Ontario as our benchmark example, general corporations in Ontario pay a combined tax rate of 26.5 percent on investment income, which combines the gross federal rate of 15 percent and the provincial rate of 11.5 percent (see chart below).

Income Tax Rates Earned by a General Corporation on M&P and Investment Income for 2018 and Beyond as of September 30, 2018

Business Tax Rates Canada - Income Tax Rates Earned by a General Corporation on M&P and Investment Income for 2018 and Beyond as of September 30, 2018

 

Tax Rates for Small Businesses

How much do small businesses pay in combined federal and provincial taxes?

A small business or CCPC (Canadian corporate private corporation) is eligible for the small business deduction (SBD), which provides a reduced corporate income tax on the first 500,000 in active business income.

As of 2018, small businesses must pay a federal rate of 10 percent on the first $500,000 (after a federal abatement of 10 percent and small business deduction of 18 percent). This rate will decrease to 9 percent in 2019.

Income exceeding $500,000 is subject to a federal rate of 15 percent (after a federal abatement of 10 percent and rate reduction of 13 percent).

The provincial rate for the first $500,000 varies from province to province, from a low of 2 percent in Alberta and Saskatchewan and a high of 8 percent in Quebec. The small business deduction (SBD) in Ontario is 3.5 percent.

The provincial rate for income exceeding $500,000 varies from a low of 11.5 percent in Ontario to a high of 16 percent in Nova Scotia and PEI.

Taking Ontario as our benchmark example, as of 2018, small businesses in Ontario pay a combined federal and provincial tax rate of 13.5 percent on the first $500,000 and a combined tax rate of 26.5 percent on income exceeding $500,000. In 2019, the combined SBD will go down one percentage point to 12.5 percent.

Income Tax Rates for Income Earned by a Small Business/CCPC for 2018 and beyond, as of September 30, 2018 (see chart below):

Business Tax Rates in Canada Income Tax Rates for Income Earned by a Small Business CCPC for 2018 and beyond, as of September 30, 2018.
Tax Rates for Small Businesses on M&P Income:

Small Businesses pay the same tax rate on M&P income as do general corporations; that is, small businesses pay a combined tax rate of 25 percent on M&P income in Ontario.

Tax Rates for Small Businesses on Investment Income:

Net investment income (NII) is income received from investment assets, such as bonds, stocks, mutual funds, loans and other investments (less related expenses). The individual tax rate on net investment income depends on whether it is interest income, dividend income or capital gains.

Small businesses pay a gross federal rate of 38.7 percent on investment income, after deducting the federal abatement of 10 percent and refundable tax of 10.7 percent.

The provincial rate on investment income varies from province to province, from a low of 11.5 percent in Ontario to a high of 16 percent in Nova Scotia and PEI.

Taking Ontario as our benchmark example, small businesses in Ontario pay a combined tax rate of 50.2 percent on investment income, which combines the gross federal rate of 38.7 percent and the provincial rate of 11.5 percent.

Income Tax Rates for Income Earned by a Small Business for 2018 and beyond, as of September 30, 2018 (see chart below):

Canada's Business Tax Rates - Income Tax Rates for Income Earned by a Small Business for 2018 and beyond, as of September 30, 2018


The federal government decreased the small business income tax rate to 10% (from 10.5%) effective January 1, 2018. The rate will further decrease to 9% effective January 1, 2019.


For more information on business tax rates in Canada & how you can best structure and optimize your business, be in touch with one of our lawyers today.

© Kalfa Law 2018

The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.

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