5. Corporate Taxes Flashcards
On what income are corporate taxes in Canada levied?
Corporate taxes in Canada are levied on the income earned by corporations operating in the country
How do corporate tax rates differ from personal tax rates in Canada?
Personal tax rates in Canada are progressive, increasing with income, while corporate tax rates are primarily flat, except for the Small Business Deduction
.
What is included in a corporation’s taxable income?
A corporation’s taxable income includes all revenue from business activities, investments, and other sources, minus allowable expenses and deductions
.
What are some examples of allowable expenses and deductions for corporations?
Allowable expenses and deductions include business expenses (e.g., salaries, rent, utilities), capital cost allowance, charitable donations (up to 75% of net income), interest on business loans, and research and development (R&D) expenditures
.
What does the corporate income tax rates applicable to taxable income depend on?
the type of income and the corporation’s eligibility for tax incentives
What is the general federal corporate income tax rate in Canada after deductions?
Subject to a flat federal tax rate of 38%, however, as a series of deductions, such as the federal abatement (10%) and the Manufacturing and Processing (13%) or the
General Rate Reduction (13%), most corporations are subjected to a federal tax of 15%
Each province and territory levies their own tax rates on top of the federal rate, which range from how many to how many %
8%-16%
What is the range of combined federal and provincial/territorial general corporate tax rates?
Combined general corporate tax rates range from approximately 23% to 31%
.
Why is the federal tax rate on Canadian Controlled Private Corporations (CCPCs) reduced to 9% for all income up to the business limit (typically $500,000)?
To support the growth of small business, federal tax rate on CCPCs on active business income reduced to 9%
How are provincial/territorial rates also reduced on top of the federal tax rate on CCPCs on active business income being reduced?
With combined rates ranging from ~9%-15%
What types of income are not eligible for the lower tax rates on CCPCs active business income reduction?
Lower rate only applicable to active business income, which is generally income earned from a business source. this means passive income, such as investment income, wouldn’t receive this preferential rate
.
While corporatioons are able to earn passive income (e.g., rental income, dividends, or interest) why is investment income earned by CCPCs taxed at higher rates?
To discourage income deferral
How is investment income earned by CCPCs taxed federally?
Investment income earned by CCPCs is taxed federally at 38.67%, with combined rates generally around 50% to 55%.
What happens when CCPCs distribute investment income as dividends?
What happens when CCPCs distribute investment income as dividends?
What is the purpose of integration in Canada’s corporate tax system?
Integration is designed to ensure that income earned through a corporation and then distributed as dividends is taxed similarly to income earned directly by an individual.
What does integration seek to create between earning income personally vs through a corporation?
Tax neutrality
What is the ultimate goal of integration?
To ensure that the total tax paid (corporate tax + shareholder tax) on income earned through a corporation equals the tax an individual would pay if they earned the income directly
What happens to the amount remaining after a corporation pays corporate taxes on its taxable income?
It becomes available to pay a dividend to the shareholders.
Who pays the taxes on dividends after they are distributed by the corporation?
Who pays the taxes on dividends after they are distributed by the corporation?
What does it mean when dividends are “grossed up”?
It means they are adjusted to reflect pre-tax corporate income, and the shareholder receives a tax credit to account for corporate taxes already paid.
How do corporate tax filing requirements differ from those of individuals?
Corporations file taxes based on their fiscal year, which can differ from the calendar year.
What is the deadline for filing a corporate tax return (T2)?
It must be filed within six months after the fiscal year-end; however taxes owed must generally ybe paid within 2 months after the fiscal year
By when must taxes owed by a corporation generally be paid?
Within two months after the fiscal year-end.
If a company has a fiscal year end of March 31, when must it pay any tax owing and file its T2 return?
It must pay by May 31 and file its T2 return by September 30.
