Corporate tax Quebec Vs. Ontario

  • by admin
  • February 21, 2022

Does corporate taxation differ in the different provinces of Canada? Do we need to explore this? The answer is “you should,” particularly if you are incorporated in Quebec.  Corporate taxation in Quebec is different from the rest of the provinces in Canada.

 

Usually, when you think of incorporating your business, you look for incorporating in the province you live. Can you incorporate it in another province? Yes, you can. This article will be more interesting for Quebec residents, particularly those in the e-commerce business. We understand that you can operate your e-commerce business from anywhere. But we are not discussing here the requirements of incorporating in the different provinces of Canada. Maybe we can cover this topic in another blog.

 

This article mainly focuses on the corporate taxation process, rates in Quebec, and a few comparisons with the Province of Ontario to help you understand which one is better and why.

Tax administration and filing

Tax administration and filing

Alberta and Quebec are only two provinces in Canada which do not have a corporate tax collection agreement with the Canada Revenue Agency (CRA). CRA stands for Canada Revenue Agency which is the Federal tax authority in Canada. When you deal with Quebec tax filing and payments, it is Quebec Revenue Authority.

You must file CO-17 (Quebec Corporate Income Tax Return) a separate income tax return with Quebec Revenue Authority if your business is incorporated in Quebec and pay taxes to the Quebec Revenue Agency’s.

You only file the T2 (Federal Corporate Income Tax Return) and some Ontario provincial tax schedules with CRA in Ontario. You pay the federal and provincial taxes owing to CRA.

Provincial corporate tax rate

Quebec’s general corporate income tax rate is 11.5%, the same as Ontario’s general corporate income tax rate. Both Quebec and Ontario allow a small business deduction to reduce the general income tax rate for small businesses.

For tax year-end on or before March 25, 2021, but after December 31, 2020, the small business deduction rate was 7.5% in Quebec. So, during this period, the effective corporate income tax rate was 4% in Quebec. Ontario small business deduction rate has been steady at 8.3% since January 01, 2020. In Ontario, the effective corporate income tax rate is 3.2%.

Quebec increases the small business deduction rate for a qualifying corporation from 7.5% to 8.3% for tax year-end after March 25, 2021. After this increase, the effective corporate income tax rate is identical in Quebec and Ontario.

Small business deduction

In Quebec, your corporation will qualify for small business deduction when it satisfies the following conditions:

 

  • Net income up to $500,000
  • The corporation is a CCPC
  • Paid-up capital is $10 million or less
  • The total number of hours worked by employees (including part-time employees) is 5,500 hours

Further explanations on the above conditions

 

  • CCPC – Canadian Controlled private corporation.
  • The small business deduction is gradually reduced when a CCPC reaches $10 million paid-up capital, and it is eliminated when a CCPC reaches $15 million in paid-up capital.
  • A CCPC can still qualify for small business deductions in Quebec if the number of hours worked by employees is between 5,000 and 5,500 hours. If the number of hours worked is below 5,000 hours in a tax year and the previous tax year, the small business deduction is reduced to zero.

 

One of the significant conditions to get the small business deductions in Quebec is the number of hours worked by the employees. This condition does apply in Ontario.

 

Let’s discuss a little more about the “number of hours worked by the employees” as required for small business deduction in Quebec.

In March 2017 budget (or as they like to call it, “Quebec economic plan”), Revenue Quebec decided to add this condition “number of hours worked by the employees” to qualify for a small business deduction. Initially, Revenue Quebec wanted the businesses to have at least three full-time employees eligible for the small business deduction. But later, they realized that many companies have part-time employees. Hence, they changed the requirement to a minimum number of hours worked to 5,500 hours per year.

What is the number of hours worked by the employees? 

  • They are on the payroll of the business.
  • They are paid at least minimum wages.
  • They can work part-time or full-time.
  • An employee can work more than 40 hours (actual), but for the above calculation of 5,500 hours, it will be only counted as 40 hours per week.
  • Majority shareholder – In addition to above, the work hours of a person who holds, directly or indirectly, a majority of the shares in the capital stock of a corporation that has full voting rights may be included in the number of paid hours of the employees of that corporation. In doing that calculation, the hours to be included correspond to 1.1 times the hours the shareholder worked in the taxation year as an active participant in the corporation’s activities. The majority shareholder can record his working hours even if he receives no salary or less than the value of his active interest in the business.

Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information

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