Do you want to know how does corporate taxation work in Canada? Before you incorporate an understanding of this process will help plan your taxes better.
All domestic corporations in Canada have to file a T2 corporate income tax return every year due by the due date. Generally, you file your T2 corporate income tax return electronically and if your annual gross revenue exceeds $1 million then the electronic filing is mandatory.
Canadian Controlled Private Corporation (CCPC)
A Canadian-controlled private corporation is a corporation that is controlled by Canadian residents. A Canadian-controlled private corporation pays a lower tax on its net income. A Canadian-controlled private corporation is entitled to claim a small business deduction from its active business income. A qualifying Canadian-controlled private corporation may sell its shares without attracting any capital gains tax by availing lifetime capital gains exemption up to a certain limit. This could be a very tax-effective tool in succession planning.
Small business deduction
As mentioned above a Canadian-controlled private corporation is entitled to claim a small business deduction from its active business income up to the corporation’s business limit for the year. The corporation’s business limit which is $500,000.00 is shared among all its associated corporations. The business limit is subject to reduction when the corporation’s aggregate (passive) investment income exceeds $50,000.00. This business limit is reduced to zero when the corporation’s aggregate investment income reaches $150,000.00. Another limitation on the corporation’s business limit is based on the taxable capital employed in Canada. The business limit starts to reduce when the taxable capital employed reaches $10 million and it is completely phased out at $15 million.
Active business income
As defined by Canada Revenue Agency, is the income earned by the corporation generally from its business sources and includes any income which is incidental to its business.
Active business income does not include income derived from a specified investment business or from personal services business, and also from specified corporate income which is defined under section 125(7)(a)(i) of the income tax act of Canada. These incomes are not eligible for small business deductions. In general, your corporate income will be reduced by the investment income (like capital gain, rent, interest, dividend, royalties, etc.) if any included in your corporate income, on schedule 7 while computing active business income that is eligible for a small business deduction.
Specified investment business
When income derived from the property which includes income such as interest, dividends, rents, or royalties comes under specified investment business. For example, if your corporate business activities consist of trading in shares and securities, options, forex or you are renting a premises, etc. are considered specified investment business, you will not be able to claim a small business deduction unless you employ more than five full-time employees in your business throughout the year. However, if you are renting the properties to a subsidiary corporation and where the subsidiary corporation is deducting these rent expenses from its active business income, your rental income may not be considered as investment income. Certain exceptions may also apply to a prescribed labor-sponsored venture capital corporation.
Personal services business
Your corporation business may be considered as personal services business when your corporation derives income from personal services performed by the shareholder, officer, or employee of the corporation. However, if you employ more than five full-time employees or your services are rendered to an associated corporation then you may not be considered as in the personal service business.
Specified corporate income
Where a Canadian controlled private corporation derives income from providing property or services to another private corporation and or to a person who does not deal at arm’s length with the Canadian Controlled Private Corporation or holds a direct or indirect interest in that other private corporation, the income would not be considered as being eligible for the SBD unless certain conditions are met.
RKB Accounting has expertise in cross-border taxation and has been providing accounting and taxation services for the last fifteen years in Canada and USA. RKB services include incorporating a business on both sides of the border, bookkeeping, sales tax, payroll, and corporate and personal income tax. RKB’s expertise includes cross-border tax planning, long-term tax planning, helping business start-ups, business structure planning, and resolving complex tax matters. RKB a CPA(Delaware), CA(India), and CIA(USA) has over 25 years of experience in accounting and taxation in dealing with various countries in the world.
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.