Canada has been making some major reforms to its corporate tax laws over the last couple of decades, making it an increasingly attractive place to start your business. Not only has the corporate tax rate decreased but it has made major progress in simplifying its tax code. Small businesses are flocking to the country to enjoy this lower tax burden and simplified tax process. So, what is the Canadian corporate tax rate and how do you navigate the new, reformed tax code?
Canadian Federal Corporate Tax Rate
The new Canadian corporate tax code includes both a federal rate that applies to businesses all across Canada and a provincial rate that differs based on which province or territory your business is in. There are also deductions, reductions, and credits that you can use to lower your tax burden even further.
We will get into all of that later on in this article. Let’s start with the federal corporate tax rate:
The general tax rate is 15% after the federal tax abatement and the general tax reduction. For small businesses, that rate is reduced even further to 9%. This tax rate applies to all income earned up to $500,000.
For businesses earning $500,000 or less, you just pay the 9% across the board and you’re done. For businesses earning more than that, you can pay the small business rate on that first $500,000 but then the general rate on any additional income.
However, as your income gets higher, the amount—called the business limit—that you’re allowed to pay the lower rate on gradually shrinks as your income increases. That gradual reduction happens according to this schedule:
- Business earning up to $10 million – $500,000 Reduction
- Businesses earning over $11 million – $400,000 Reduction
- Businesses earning over $12 million – $300,000 Reduction
- Businesses earning over $13 million – $200,000 Reduction
- Businesses earning over $14 million – $100,000 Reduction
- Businesses earning over $15 million – No Reduction
So this means that businesses earning $10 million can pay 9% on the first $500,000 and then 15% on the rest. Meanwhile, businesseses earning between $11 million and $12 million can only apply the 9% rate to the first $400,000 and then switch to the 15% rate on the rest of their income. For income above $15 million, your business will begin paying the higher general tax rate across the board.
It’s important to keep in mind that this reduction schedule and the small business tax deduction, in general, applies to active business income. Any investment income is not included.
Provincial Corporate Tax Rates
You will also have to pay provincial corporate tax rates on top of the federal rate. The provinces rely on two rates, a lower rate and a higher rate.
The lower rate applies to any small business that qualifies for the federal small business deduction. So, if you qualify for the federal deduction, you qualify for the lower rate automatically. This lower rate is also based on a business limit. Nearly all provinces use the same $500,000 limit that is used for the federal rate. The one exception is Saskatchewan which has a slightly higher limit of $600,000.
The higher rate applies to any income you earn above that $500,000 (or $600,000) limit. Just like the federal tax rates, that business limit gradually decreases as your income increases so businesses earning $15 million or more will have to pay the higher rate across the board.
Corporate Tax Rates by Province
Here is a quick breakdown of the higher and lower corporate tax rates for each province and territory in Canada:
|Province or Territory||Higher Rate||Lower Rate|
|Newfoundland and Labrador||15%||3%|
|Prince Edward Island||16%||3%|
Alberta and Quebec are not included in this table because they have their own corporate tax system which they administer on their own. Their rates are as follows:
|Province or Territory||Higher Rate||Lower Rate|
How to Lower Your Corporate Tax Rates
Canada offers a lot of opportunities for small businesses to lower their corporate tax burden. The biggest relief comes from the special lower rate for small businesses discussed above. That’s a 6% savings on your Canadian federal corporate tax rate and another 10% or so savings on your provincial corporate tax rate, depending on which province you’re in.
However, the actual savings that represents does depend on it being active business income. If too much of your income is investment income, you may not be able to enjoy this reduction. Starting in 2018, Canada modified the business limit to factor in investment income. That schedule is as follows:
- If your total investment income is $50,000 or less, it will have no effect on the $500,000 business limit.
- If your total investment income is between $50,000 and $75,000, your new business limit is reduced to $375,000.
- If your total investment income is between $75,000 and $100,000, your new business limit is reduced to $250,000.
- If your total investment income is between $100,000 and $125,000, your new business limit is reduced to $125,000.
- If your total investment income is $150,000 or above, your business limit is reduced to $0.
If your active business income is still less than the business limit, even after that limit is reduced because of your investment income, your taxes won’t be affected by this. For example, say you got $75,000 in investment income last year but your total business income was under $375,000. You’ll still get to pay the lower corporate tax rate on all of your income.
In addition to this lower rate, you may qualify for additional deductions and credits depending on the type of business and the source of your income.
Tax deductions help reduce the amount of your income that is taxable. They won’t result in a refund but they can make a huge difference in the amount you owe. Here are some of the tax deductions your small business might qualify for:
- Manufacturing and processing profits deduction
- Home business tax deductions
- Allowable reserves deduction
- Private health services plan premiums deduction
- Allowable business expenses deduction
Tax credits can reduce the amount you owe just like deductions would. The difference is that these can potentially result in a refund. These are some of the federal tax credits available to your business in Canada:
- Canadian film or video production tax credit
- Scientific research and experimental development investment tax credit
- Other investment tax credits
- Canadian journalism labour tax credit
- Film or video production services tax credit
- Federal foreign business income tax credit
- Federal qualifying environmental trust tax credit
- Federal foreign non-business income tax credit
- Federal logging tax credit
- Apprenticeship job creation tax credit
These tax deductions and credits will get applied to both your federal and provincial taxes.
How to File Corporate Tax Returns
You have to file a T2 tax return every year, even in years where you didn’t make any money or your business was inactive. The only way to avoid this requirement is to officially dissolve the corporation. However, Canada has made a huge effort to simplify the tax filing process. It’s even gone so far as allowing the CRA (Canadian Revenue Agency) to handle both federal and provincial taxes for all provinces and territories except Alberta and Quebec.
That means that you just file one form and pay one bill. The CRA will take care of distributing the portion of that tax bill that goes to your province. For Alberta and Quebec, you will have to file separate tax returns, one for your federal corporate taxes and one for your provincial taxes.
Fortunately, you can do this all online. If you’re using cloud accounting software for business, the process couldn’t be easier. The GIFI codes that the T2 tax return uses to digitally label the different line items on the tax return are the same that are used by most cloud accounting software. This means that you’ll be able to just import that data over onto your tax return.
When to File Corporate Tax Returns
Your due date depends on your business’s fiscal year. The general rule is that you have to file that T2 within six months of the end of your fiscal year. You have until the last day of the sixth month to file. If your fiscal year ends on June 30th, that tax return has to be filed with the CRA no later than December 31st.
If your fiscal year doesn’t end at the end of a month, you have to file no later than that day of the sixth month. For example, if your year ends June 16th, your due date is December 16th .
If your due date lands on a weekend, you have up until the following Monday to file and still be considered as filing on time. For example, if December 31st lands on a Saturday, you could file on January 2nd and the CRA would still count this as on time. This same rule applies to public holidays. You can file on the first business day after that holiday.
If you miss your due date, you will be charged penalties for late payment. That penalty is an additional 5% of your total balance owed plus another 1% for each month that you are late. If you were late in any of the three previous years, that penalty goes up to 10% of your balance plus an additional 2% for each month that you are late.
That increased penalty applies even if your reason for not filing in a previous year was because you didn’t make money or your corporation was inactive. So, it’s really important that you remember to file your T2 on time, every year.
For the most part, small businesses in Canada can easily file their taxes and qualify for the lower CRA corporate tax rates. In most provinces, you’ll file just the one form and import the appropriate data from your accounting software. The only exceptions here are Quebec and Alberta where you will have to file a separate tax return to their provincial revenue agency. However, if you’ve got cloud accounting software for business and you use a compatible tax preparation software, that will still be a breeze.