- Author:counter-team
- Reading time: 9 minutes
- Category: tax elements
When you run a business, tax time presents a unique set of headaches and difficulties. The corporate tax rate varies from province to province and regulations can change on a yearly basis, making it difficult to calculate the corporate tax rate even for a small business with few assets and lower income.
In this post, we look at the details of the Canada corporate income tax rate and how the different rates affect your business. Get everything you need to know about federal tax rates, CPCC rates, historical tax rates, and tax rates related to capital gains and investments.
Please note that you should always consult directly with an experienced tax professional to calculate your company's corporate tax rate for filing and planning purposes. Contact your accounting team or CPA for information on custom quotes.Tax declarations and tax planning for your company taxesevery year. All figures refer to fiscal year 2020.
What is the corporate tax rate in Canada?
The corporate tax rate differs based on the company's sales, location of operations, services, and sources of income. However, the corporate tax rate, in these different forms, applies to all corporations and small businesses operating in Canada. The only entities exempt from this obligation in Canada are tax-exempt Crown corporations, Hutterite colonies and incorporated charities.
Canada has two tiers of federal corporate tax rates, also known as dual rates.
The federal small business tax rate, also known as the reduced rate or Canada Controlled Private Company (CCPC) rate, is 9%. To receive this corporate tax rate, you must meet certain requirements.
The general federal corporate income tax rate, also known as the higher rate, is 38%, with a 10% federal tax reduction and a 13% general tax reduction, leaving a total of 15% of the net tax for companies in general.
In addition to the applicable federal corporate tax rate, a corporation must also pay the state corporate tax rate, which varies from state to state. There are also specific corporate tax rates for capital income, capital gains and dividends.
Let's narrow that down and look at these corporate tax rates one by one to give you a better understanding of how they affect your business.
Canadian federal corporate tax rate
The term general corporation refers to a corporation that is not a CCPC. A general corporation generally includes public corporations and their Canadian resident subsidiaries and private Canadian corporations controlled by non-residents. Manufacturing and processing companies, known as M&Ps, also use these corporate tax rates.
The state corporate tax base is 38%, with a 10% state tax reduction and a 13% general tax reduction, leaving an effective corporate tax rate of 15% for corporations in general.
In addition to general corporations and M&P corporations, CCPC income above the small business threshold is eligible for the general corporate tax rate.
The general 13% tax credit does not only apply to:
- The first $500,000 in active business income earned by CCPC
- CCPC ROI
- Income from certain other companies, including mutual fund companies, mortgage investment companies, and investment companies
For information on the CCPC corporate tax rate, see the 2020 Small Business Tax Rate (CCPC) table in the next section.
General Tax Rate / 2020 M&P | |
Bund | 15% |
Alberta | 10%/8% |
BC | 12% |
Manitoba | 12% |
Nueva Brunswick | 14% |
Newfoundland y Labrador | 15% |
New Scotland | 16%/14% |
Northwest Territories | 11,5% |
Nunavut | 12% |
ontario | 11,5% |
Prince Edward Island | sixteen% |
Québec | 11,5% |
saskatchewan | 12% |
Yukon | 12% |
Canada Small Business Corporate Tax Rate
Small businesses in Canada may qualify for different tax rates depending on their structure and volume of business.
Canadian Controlled Private Corporations (CCPCs) reduce their corporate income tax rate on their active business income through the Small Business Deduction (SBD). The SBD is based on small business limits, currently set at $500,000 in most provinces and territories. The SBD reduces the Part I tax that a business would have to pay.
The SBD is a certain percentage (the SBD Rate) of any of the following amounts in acorporate tax returnand less:
- income from active business activities in Canada (line 400)
- taxable income (line 405)
- the commercial limit (line 410) any of the following:
- For tax years beginning before 2019, the value on line 427, which is the reduced trading limit on line 425 minus the value of the trading limit you assigned in subsection 125(3.2).
- For tax years beginning after 2018, the amount of line 428, which is the reduced trading limit of line 426, less the amount of the trading limit assigned by you in subsection 125 (3.2).
If the tax rate changes during the tax year because your business income exceeds or falls below the SBD threshold, you must base your calculation on the number of days of the year each tax rate applies.
The small business deduction is designed to help SMEs, start-ups, and small businesses meet their tax obligations, while providing benefits and incentives to larger businesses.
business limit | |
Bund | 500 000 $ |
Alberta, BC, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Northwest Territories, Nunavut, Ontario, PEI, Quebec, Yukon | 500 000 $ |
saskatchewan | 600 000 $ |
Listed below are the federal and provincial small business income tax rates that apply to a business claiming the small business tax credit. For Canadian-controlled private companies that are eligible to claim the small business deduction, the effective federal business income tax rate is 9%.
Small Business Tax Rate (CCPC) 2020 | |
Bund | 9% |
Alberta | 2% |
BC | 2% |
Manitoba | 0% |
Nueva Brunswick | 2,5% |
Newfoundland y Labrador | 3% |
New Scotland | 3%/2,5% |
Northwest Territories | 4% |
Nunavut | 3% |
ontario | 3,2% |
Prince Edward Island | 3% |
Québec | 5% |
saskatchewan | 2% |
Yukon | 2% |
Corporate income tax rate for capital gains Canada
A capital gain refers to any gain obtained from the sale of capital or passive assets, including businesses, stocks, shares, goodwill, and land. Capital gains must be included in a corporation's reported taxable income. However, only half (50%) of a corporation's capital gains must be included in income. This is known as the capital gains inclusion rate.
Since only 50% of a capital gain is taxable, the corporate capital gains tax rate is 50% of the capital gains tax rate. This is a high tax rate and any business that may have a capital gain in the future should work with a tax advisor to understand the tax implications of all sales and gains.
Businesses can also use capital losses to offset capital gains.
Income tax rate for business investments in Canada
Income from investing in Canada can take many forms for a business. Investment income consists primarily of income from real estate, including rent, interest, dividends, capital gains, and royalties. Investment income is not directly related to active income from a company's core business and is commonly known as passive income. Depending on the size of the company and its operations, capital gains can represent a significant portion of a company's total revenue.
In January 2019, the new IRC rate regulation on capital gains came into force. If your passive investment income exceeds the current threshold of $50,000 in a year, your business' ordinary business income tax rate will increase. The intention of this new legislation is that the profits of the companies are invested in the business itself and not in the growth of passive income. Now, CPCCs seeking to keep their corporate tax rate low have no incentive to increase their passive investment income and are discouraged from using certain corporate structures to generate significant investment income.
Corporate tax rates in Canada are as follows:
Region | Capital Gains Tax Rate 2020 |
Bund | 38,7% |
Alberta | 10% |
BC | 12% |
Manitoba | 12% |
Nueva Brunswick | 14% |
Newfoundland y Labrador | 15% |
New Scotland | sixteen% |
Northwest Territories | 11,5% |
Nunavut | 12% |
ontario | 11,5% |
Prince Edward Island | sixteen% |
Québec | 11,5% |
saskatchewan | 12% |
Yukon | 12% |
Corporate tax rates by province
In general, provinces and territories have two corporate tax rates, a higher rate and a lower rate, for different types of businesses.
The lower rate applies to the federal small business income deductible (SBD) below the business threshold. Some provinces choose the federal business limit of $500,000, while others, as noted, set their own. The higher rate applies to all other income.
These tax rates apply to all provinces and territories except Quebec and Alberta, as these provinces do not have corporate tax collection agreements with the CRA (Canada Revenue Agency).
province or territory | lower rate | highest rate |
3% | 15% | |
3% | sixteen% | |
2,5% | 14% | |
3% | sixteen% | |
3,2% | 11,5% | |
Null | 12% | |
2% | 12% | |
2% | 12% | |
3% | 12% | |
4% | 11,5% | |
2% | 12% |
Ontario Corporate Income Tax Rate
The basic corporate tax rate in Ontario is 11.5%. The Ontario Small Business Deduction reduces this rate to the lower rate of 3.2% for eligible businesses. Ontario's business threshold is $500,000, and any business with sales below that amount is eligible for this lower rate.
Ontario is one of the provinces phasing out the small business withholding credit for CCPCs with more than $10 million of Canadian capital employed in the prior fiscal year. It is completely eliminated if the taxable capital is $15 million or more in the most recent taxable year. This is known as lowering the taxable capital business threshold.
Ontario has one of the lowest base corporate tax rates in Canada, making it an attractive province to set up a business.
Canada Corporate Tax Calculator
Calculating the corporate income tax rate requires navigating provincial and federal regulations and a thorough understanding of your company's finances. Many commercially available corporate tax rate calculators do not provide accurate estimates and can create even more confusion.
Working with an experienced chartered professional accountant (CPA) to calculate your corporate taxes is the best way to ensure the absolute accuracy of your corporate tax rate calculation. A miscalculation, a lost document or an error can lead to serious penalties that affect your results. Always consult a corporate tax advisor for the calculation, presentation and planning of your corporate tax.
History of Canadian corporate tax rates
Canada's corporate income tax rate is subject to change each year based on federal and state law. While this variation can be as little as 0.5%, it can sometimes vary by more than 2% from year to year. The $500,000 trade limit has been standard in Canada for more than a decade, but Manitoba and Saskatchewan are two examples of provinces that have recently adapted it.
In the last decade, 2008 was the highest corporate tax rate for general corporations and CCPCs. In contrast, the lower federal corporate income tax rates for general corporations and CCPCs are the 2021 rates effective as of 2019.
Knowing the historical corporate tax rate in Canada is part of ensuring comprehensive and analytical tax planning for the future of your business.
Canadian corporate tax rate vs. USA
Comparing Canada's corporate tax rate to the US is, in many ways, like comparing apples to oranges. Basically, the tax rates between countries are very similar.
Canada's corporate tax rates have two parts: federal (15%) and provincial (ranging from 0% to 16%, depending on the classification). In general, most Canadian companies can expect to pay a corporate tax rate between 26.5% and 31%.
On the other hand, the US corporate tax rates consist of several parts. First, the federal corporate tax rate is 21%. So state and local tax rates are between 0% and 12%. Finally, there are other corporate tax rates that vary from state to state and from locality to locality. A US corporation can deduct its state and local income tax expense when calculating its federal taxable income, which typically results in a net effective tax rate of around 27%.
In general, the corporate tax rate in Canada and the US is very similar. If your company operates in both countries, you will need to follow very different steps between countries when calculating your corporate tax rate.
Get help managing your corporate taxes
Managing your corporate income tax rate, filing it, planning it, and paying it can seem daunting. Your specific corporate tax rate depends on several factors, including income, location, sources of income, dividends paid, ownership structure, and more. No two companies have the same corporate tax structure.
At Accountor CPA, we strive to take the stress out of predicting your corporate tax rate. We work with companies of all sizes in Canada and even overseas companies with offices in Canada to successfully navigate these complex regulations.
To get the most profit from your business, you should always work with qualified and experienced employees.tax accountingprofessionals Find out how we can help you make smart financial decisions and plan your taxes thoroughly.
Contact us today for a free consultation.
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FAQs
How are capital gains taxed in a small business in Canada? ›
Capital gains: In Canada, only 50% of the total capital gains is taxable. It is included in your annual taxable income and taxed at your marginal tax rate. Capital gains only apply when you sell an asset at a profit.
What is the corporate tax rate on capital gains in Canada? ›Capital Gains Corporate Tax Rate Canada
This is known as the capital gains inclusion rate. Because only 50% of a capital gain is taxable, the corporate tax rate on capital gains is 50% of the tax rate on investment earnings.
Corporate taxpayers must fully include both long-term and short-term capital gains in gross income. All types of capital losses, long-term and short-term, are fully deductible from all types of capital gains, long-term and short-term. Corporate capital gains generally are taxed at the same rate as ordinary income.
What is the capital gains exemption for small business CRA? ›Lifetime capital gains exemption limit – For dispositions in 2022 of qualified small business corporation shares, the lifetime capital gains exemption (LCGE) limit has increased to $913,630.
What is the corporate capital gains tax rate for 2022 in Canada? ›Capital gains are subject to the normal CIT rate. If the assets were held for two or more years, the gain will be taxed as a capital gain at a 10% flat rate (recapture rules are applicable). If the assets were held for less than two years, the gain will be taxed as ordinary capital income (35% for FY 2022).
What is the capital gains tax rate for small business? ›If you sell an asset that you've held for more than 12 months, the proceeds will be treated as long-term capital gains. The maximum tax rate on capital gains for most taxpayers is 15%. Proceeds treated as ordinary income are taxed at the taxpayer's individual rate.
How are C Corp capital gains taxed? ›The gain on the sale of the assets of a C-Corporation is taxed at normal corporate rates, which usually ranges from 34% to 39%, and there are more taxes to come! When the corporation sells its assets, the net proceeds after the corporate taxes belong to the corporation, not the owner.
How do corporations report capital gains? ›Your basis, the sales price, and the resulting capital gain or loss is entered on Form 1040, Schedule D, Capital Gains and Losses. Gains from the sale of business property are reported on Form 4797, Sales of Business Property and flow to Form 1040, Schedule D.
Why do corporations prefer capital gains? ›In general, the netting rules give corporations a preference for capital gains income over ordinary income but ordinary losses over capital losses. Capital gains have an advantage over ordinary income in their ability to offset capital losses.
Do corporations have capital gains exemption? ›Capital gains can include profits from the sale of property, business shares, stocks, bonds, and other valuables. However, the LCGE only applies to specific assets. It provides an exemption for small business corporation owners who sell shares of their company.
What is the $500 000 capital gains exemption in Canada? ›
Because you only include one half of the capital gains from these properties in your taxable income, your cumulative capital gains deduction is $500,000 (1/2 of a LCGE of $1,000,000). The capital gains deduction limit on gains arising from dispositions of QSBCS in 2021 is $446,109 (1/2 of a LCGE of $892,218).
What are the 4 small business CGT concessions? ›The four CGT concessions include the small business 15-year exemption, the small business 50% active asset reduction, the small business retirement exemption, and the small business rollover. Basic eligibility conditions include a turnover test ($2 million) and a maximum net asset value test ($6 million).
How to avoid capital gains tax on business sale in Canada? ›- Put your earnings in a tax shelter. Tax shelters act like umbrellas that shield your investments. ...
- Offset capital losses. ...
- Defer capital gains. ...
- Take advantage of the lifetime capital gain exemption. ...
- Donate your shares to charity.
2022 Tax Year
For tax years beginning after 12/31/17, the "C" corporation Federal tax rate is a flat 21%. Owners of business entities, which are not taxed as “C” corporations, are eligible for a 20% Qualified Business Income (QBI) deduction.
This measure sets the: Corporation Tax charge and main rate at: 19% for the financial year beginning 1 April 2022. 25% for the financial year beginning 1 April 2023.
Does Canada have unrealized capital gains tax? ›Canadians only pay tax on realized capital gains, not unrealized. This is notable because knowing that you have investment assets that have increased in value on paper means you can time the sale during a tax year when you make less income to reduce the amount of tax you owe.
What is small business 15 year CGT exemption? ›15-year exemption If the business asset being sold had been owned for at least 15 years, the entire capital gain may be exempt from tax under the 15-year exemption. The entire sale proceeds maybe contributed into superannuation using the CGT cap (up to the lifetime limit).
What is the long-term capital gain rate for C-Corp? ›Getting Money Out of the C Corporation
If the stock was held for longer than 1 year, then it is taxed at the reduced long-term capital gains tax, which currently is 0%, 15%, or 20%, depending on income; otherwise, the gain is taxed as ordinary income.
A C-corp simply applies the corporate tax rate of 21% to its taxable income. For example, if the company has taxable income of $100,000, the tax due would be $21,000 ($100,000 x 21%).
How do I calculate my C-Corp tax basis? ›Basically, an initial basis in the stock of a C Corporation is either the cost of the stock purchased or, for qualifying Section 351 transactions, the adjusted basis of the assets transferred plus the gain recognized, and minus boot received and liabilities transferred.
How do I report capital gains tax in Canada? ›
Use lines 13199 and 13200 of Schedule 3, Capital Gains (or Losses), to calculate and report all your capital gains and capital losses from your mutual fund units and shares. List the information for each mutual fund separately. Multiple redemptions from the same fund in the same year should be grouped together.
How do businesses avoid capital gains tax? ›Holding on to the business and its assets for at least one year before selling can help you take advantage of the more favorable long-term capital gains tax rate. Sell to employees. If you own a C-corporation, you may be able to minimize capital gains tax by selling the business to your employees.
What is the best way to avoid capital gains tax? ›- Invest for the long term. ...
- Take advantage of tax-deferred retirement plans. ...
- Use capital losses to offset gains. ...
- Watch your holding periods. ...
- Pick your cost basis.
Your company must be a small business corporation (SBC) at the time of the sale. It must be a share sale of your business (sole proprietorships and partnerships do not qualify). More than 50% of the business's assets must have been used in an active business in Canada for 24 months prior to the sale.
What is the capital gains exemption on sale of small business shares? ›An individual who owns shares in a qualifying small business corporation may be able to claim an $800,000+ lifetime capital gains exemption (LCGE) when those shares are sold. The actual capital gains deduction is 50% of the capital gains exemption.
How does the capital gains exemption work in Canada? ›The lifetime capital gains exemption (“LCGE”) provides Canadian resident individuals with a significant tax benefit when disposing of qualified small business corporation shares (“QSBCS”). Upon disposal, 50% of the LCGE is netted against the taxable capital gain, eliminating some or all of the taxable capital gain.
Can I avoid capital gains tax by reinvesting in Canada? ›Individuals (other than trusts) may defer capital gains incurred on certain small business investments disposed of in 2022. This deferral applies to dispositions where you use the proceeds to acquire another small business investment.
Is there still a lifetime capital gains exemption in Canada? ›One of the more generous aspects of Canadian taxation is the Lifetime Capital Gains Exemption (LCGE). For the 2022 tax year, if you sold Qualified Small Business Corporation Shares (QSBCS), your gains may be eligible for the $913,630 exemption.
Who can claim 50% CGT discount? ›When you sell or otherwise dispose of an asset, you can reduce your capital gain by 50%, if both of the following apply: you owned the asset for at least 12 months. you are an Australian resident for tax purposes.
What is the 15 year rule for small business CGT concessions? ›Small business 15-year exemption
You will not pay CGT when you dispose of an active asset if you meet both of the following additional requirements: you are aged 55 years or older and retiring, or are permanently incapacitated. you have continuously owned the asset for at least 15 years.
Who qualifies for small business CGT concession? ›
To be eligible to apply these CGT concessions, the net value of all assets of the business AND its related persons & entities must be less than $6m or, failing that, the business must qualify as a CGT small business entity.
What is the CGT small business lifetime cap? ›The lifetime CGT cap for 2021/22 is $1.615 million (indexed annually) and operates separately from the non-concessional contribution (NCC) and concessional contribution (CC) caps, allowing you to get more money into superannuation.
How do you calculate capital gains on sale of business? ›Determine your realized amount. This is the sale price minus any commissions or fees paid. Subtract your basis (what you paid) from the realized amount (how much you sold it for) to determine the difference. If you sold your assets for more than you paid, you have a capital gain.
What happens if you don't report capital gains Canada? ›You may have to pay a federal and provincial or territorial penalty if you fail to report an amount of $500 or more for the following: your 2022 tax return. your 2019, 2020, or 2021 tax return.
What is the one time capital gains exemption? ›If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. Publication 523, Selling Your Home provides rules and worksheets.
Do you pay tax when you sell your business in Canada? ›The sale is generally taxable as a capital gain based on the difference between the proceeds and the cost of the assets, with personal tax ranging from 0% to 27% depending upon your other sources of income and your province of residence.
How much capital gains will I pay when I sell my business? ›The current long-term capital gains tax rates are 0%, 15% and 20%, depending on income. When applying capital gains tax rules to the sale of a business, the IRS typically looks at the individual assets of the business.
How is capital gains calculated in Canada? ›To calculate your capital gain or loss, subtract the total of your property's ACB, and any outlays and expenses incurred to sell your property, from the proceeds of disposition.
Is sale of business assets capital gain? ›If the person sells a capital asset that forms part of the block of assets on which depreciation has been allowed as per the provisions of the Income Tax Act, the income from such sales is a capital gain.
What is the 2023 lifetime capital gains exemption? ›Lifetime capital gains exemption: The lifetime capital gains exemption is $971,190 in 2023, up from $913,630 in 2022.
What is the capital gains exemption for 2023 in Canada? ›
The lifetime capital gains exemption (LCGE) amount on the sale of qualifying small business shares is rising to $971,190 in 2023, up from $913,630 in 2022, an increase of $57,560, providing a great opportunity for tax savings for clients considering selling a business.
How do you calculate capital gains on a business? ›Capital gain calculation in four steps
Determine your realized amount. This is the sale price minus any commissions or fees paid. Subtract your basis (what you paid) from the realized amount (how much you sold it for) to determine the difference. If you sold your assets for more than you paid, you have a capital gain.
Capital Gain Tax Rates
The tax rate on most net capital gain is no higher than 15% for most individuals.
- Invest for the long term. ...
- Take advantage of tax-deferred retirement plans. ...
- Use capital losses to offset gains. ...
- Watch your holding periods. ...
- Pick your cost basis.