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Canadian Business Taxation
DISCLAIMER - The information provided here is of a general nature and may not apply to any specific or particular situation. It is not to be considered as a legal advice nor presumed to be indefinitely up to date.
1. Income Taxation Administration
Both
Federal and provincial Governments levy income taxes in Canada.
Federal Income Taxes
Federal
income taxes are imposed under the Income Tax Act (ITA) and the Regulations
enacted pursuant to the ITA. In Canada both the federal and provincial
governments impose income taxes on residents and non-residents. Under the
ITA, income tax is imposed on the total world income of residents and on
Canadian source income of non-residents. Business and property income is
determined according to generally accepted accounting principles except
where there is a specific statutory rule to the contrary.
At present, only one half of net capital gains are subject to tax.
In general, an exemption from income tax on up to $100,000 of net capital
gains for individuals and up to $500,000 of capital gains realized by
individuals in respect of shares of certain Canadian corporations is
available.
As
a general rule, non-residents are subject to tax on Canadian-source
income. Income from
businesses carried on in Canada, income from employment exercised in
Canada and net capital gains from the disposition of certain properties
are generally taxed in the same way as in the case of residents.
Non-residents are not able to claim the exemptions available to resident
individuals in respect of capital gains.
Income from property (eg. dividends and interest) is generally
subject to a 25 percent withholding tax. Canada's ability to tax
non-residents and rates of tax may be modified by treaty, as it is under
the Canada/U.S. Tax Treaty. Canada
has entered into income tax agreements with over 50 countries.
The purpose of these treaties is to avoid double taxation in
circumstances where a taxpayer is subject to tax both under the Canadian
Act and under the taxing statute of another country on the same income.
Accordingly, in considering the question of liability to Canadian income
tax, it will be important to consider not only the Canadian Income Tax Act
but also the provisions of any applicable tax agreement.
Provincial Income Taxes
Ontario
imposes income taxes under the authority of the provincial Income Tax Act,
which applies to individuals and trusts, and the Corporations Tax Act,
which applies to any corporation incorporated in Canada that has a
permanent establishment in Ontario. The federal taxation authorities
administer the Ontario income tax applicable to individuals and a separate
provincial income tax return is not required. The province administers the
Ontario corporate income tax, and a separate Ontario corporate tax return
must be filed within six months of the corporation’s year-end.
2. Corporate Income Taxation
Corporations,
like individuals, are subject to both federal and provincial income taxes.
The taxation of corporations differs from the taxation of individuals in
two respects. (1) Corporations may be subject to a federal and provincial
tax on capital. (2) Whereas individuals are subject to progressive tax
rates, corporations are subject to flat rate of tax. The rates of tax
depend on the type of corporation and source of its income. The tax
treatment of corporations seeks to accomplish two main tax policy
objectives: (1) to reduce the rate of corporate tax and to reduce or
eliminate a tax bias against incorporating; (2) to avoid an undue tax
deferral advantage which may result if the corporate tax rate is less than
the maximum tax rate for individuals. The
basic federal corporate tax rate is 38%. To this amount added the
applicable provincial corporate tax. However, in order to provide room for
the imposition of provincial tax the Income Tax Act reduces the federal
tax rate by 10%. This reduction is known as the provincial abatement. The
provincial abatement applies only to corporations earning income that is
attributable to any province in Canada. If a corporation carries on
business in the United States, no provincial abatement applies, no
provincial corporate tax will be payable, and the corporation will pay tax
at a federal tax rate of 39.12% (including the federal surtax of 1.12%).
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