If you’re like most small business owners, you’re probably pretty confused about all the rules and regulations involved in determining your taxes and filing your corporate tax return. There are numerous decisions to be made throughout the year that will determine how much tax your corporation is on the hook for.
Corporate Tax Rates, Filing, and Payment
Federal Corporate Tax Rates
Corporate tax rates are based on the province where the corporation is located and the size of the business.
The base federal tax rate is 38% of the taxable income of the business, but there are certain deductions for which a business might be eligible, including the following:
- A business that is a Canadian Controlled Private Corporation (CCPC) is eligible for the small business deduction—a reduced rate of tax of 10.5% on its income up to the amount of $500,000.
- For income earned in a Canadian province or territory, the tax rate is reduced by 10% through the federal tax abatement. The abatement does not apply to income earned outside of Canada, or income that is eligible for the small business deduction.
- Corporations with gross revenue from manufacturing and/or processing that’s at least 10% of total revenue can claim the manufacturing and processing profits (MPPD) deduction. The MPPD rate is 13% on income that is not eligible for the small business deduction.
Provincial Corporate Tax Rates
The general tax rates and small business tax rates for all provinces except Alberta and Quebec can be found here.
Alberta and Quebec do not have corporation tax collection agreements with the CRA. The tax rates for those provinces can be found on their respective government websites.
Filing Corporate Tax Returns
- With few exceptions, all corporations operating in Canada, even if they have no income or are inactive, are required to file a corporate tax return. This includes non-profits and tax-exempt corporations.
- Any corporation that carried on business in Canada, had a taxable capital gain, or disposed of Canadian property has to pay both federal and provincial corporate income tax.
- Tax returns must be filed within six months of the end of the corporation’s tax year. Unlike personal tax returns, which have a December 31 year end, a corporation can elect any date for its year end.
- The T2 return also serves to file provincially and territorially, except for Alberta and Quebec. These provinces do not have corporation tax collection agreements with the CRA, so the provincial returns must be filed separately.
It’s important to file on time to avoid late filing penalties.
Paying Corporate Taxes
With the general exception of new corporations or corporations with less than $3,000 in taxes payable for the year, corporate taxes are paid in either monthly or quarterly installments over the year. The CRA has worksheets to determine the amount of installment payments. Penalties will be applied to late payments.
The CRA accepts virtually all forms of payment, including payments through your financial institution.
Some Common Small Business Owner Questions
Salaries vs Dividends: How Should I Pay Myself?
When you pay yourself a salary, the payments are a company expense, which reduces the company’s net income. The salary is personal employment income for you, for which you will be issued a T4 slip. Your company will need to register a payroll account with the CRA and withhold CPP, EI (if applicable), and tax from the payment, which it will then remit to the CRA along with the company’s CPP and EI contributions.
Dividends are not a company expense and do not affect the company’s income or amount of corporate taxes payable. They are paid from the company’s after-tax income. Since tax has already been paid on the amount of the dividends, your personal tax liability will be reduced through a dividend tax credit. You, and any other shareholders who received dividends, will be issued T5s.
The advantages of paying yourself a salary:
- A salary allows you to contribute to your RRSP whereas a dividend does not.
- You have CPP contributions that will increase the amount of CPP you collect when you reach the age of 60-65. On the flip side, you have less available cash now.
- Since income tax is withheld from your salary, you won’t be faced with an unpleasant tax situation when it’s time to file.
The advantages of paying yourself dividends:
- If maximizing your cash now is more important than maximizing it in the future, dividends will accomplish this objective.
- You’ll have less red tape to deal with, like setting up a payroll account with the CRA and making regular remittances. This is probably most beneficial in the early years of your corporation when you’re simply trying to grow your business.
- Since T5s are only issued at year end, there’s only one chance of incurring a late filing penalty.
Which method of paying yourself has lower combined corporate and personal tax?
Unfortunately, there’s no one-size-fits-all answer to this question. This is something that needs to be examined on a case-by-case basis by a tax specialist.
Employees vs Subcontractors: What’s the Difference?
There are several advantages in a subcontractor relationship:
- As the business owner, you are not responsible for all the payroll paperwork and obligations that come with employees: payroll remittances for CPP, EI, and income tax.
- The business has lower expenses, and thus higher cash flow, since it doesn’t have to make any contributions for CPP, EI, insurance, or pension plans.
- When less work is coming in, as in a seasonal business, there is no obligation to provide work for subcontractors as there is for employees.
- Subcontractors are essentially self employed and can claim any reasonable business expenses incurred.
While there could be financial advantages for both you and your subcontractors, it’s not as simple as just saying someone is a subcontractor. The CRA, if it investigates, will look at all the details of the working relationship and consider the intent of the relationship to see if there is evidence of an employer-employee relationship. If it finds such evidence, there could be costly payments and penalties involved.
So, while it might be tempting to claim someone is a subcontractor, it’s advisable to read the “Employee or Self-employed?” guide on the Government of Canada website to ensure you stay out of trouble.
What is My Shareholder Loan Account?
You may have seen accounts on your company balance sheet called “Shareholder Loan“, “Due from Shareholder” or “Due to Shareholder” and wondered what they’re all about.
Quite simply, if one of these accounts is on the asset side of your balance sheet, it’s money that you owe to your company. For example, you may have withdrawn some money from the company for personal use.
If it’s on the liability side of your balance sheet, it’s money that your company owes you. You may have advanced your company some funds, or paid for some company expenses personally.
So, what’s the problem?
If it’s on the liability side, there is no problem. You can simply withdraw the money whenever you choose with no tax consequences.
But if it’s on the asset side, there could be problems. If you don’t repay that balance within a year, the CRA might deem it as personal income and you’ll be on the hook for paying taxes on that income. Worse yet, your company will not be allowed to deduct that amount. So essentially, there is double taxation on that amount.
To prevent this from happening, you can declare that amount as a dividend or salary or, if possible, simply repay it within a year. But don’t think you can repay it before your year end and then withdraw it again after your year end. The CRA is wise to that, and will treat it as though it wasn’t repaid.