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Canada Corporate Tax 101: Corporate Tax Rates & How To Prepare, File And Reduce Corporate Income Tax

Filing corporate taxes in Canada is slightly different from filing personal taxes, as corporate taxation is considered a separate legal identity. Now, you must be wondering what makes corporate taxes different from personal taxes; it is because:

  • While personal taxes are charged on an individual’s taxable income, corporate taxes are charged on the identity of the business or company, not on its owner.
  • Unlike personal income taxes, corporate taxation follows different charging obligations.

Corporate Taxes vs. Personal Taxes: Corporate tax filing is a separate legal entity as it is different from the personal tax filing process.

What are the Corporate Tax Rates?

The Canadian-controlled private corporation (CCPC) gets the best corporate tax rate. As Canadian-controlled private corporations are allowed to claim small business deductions, they need to pay a net tax rate of 9% (January 1, 2019, onwards).

For the rest of the corporations in Canada, the basic rate of Part I tax is 38% of the taxable income.

The corporate tax rate is 15% after the general tax reduction.

The basic rate for corporation tax is 38% of the taxable income, whereas the Canadian-controlled private corporation (CCPC) pays 9% of the net tax rate.

Types of Corporations in Canada

When it comes to different types of corporations in Canada, we can mention two categories – one that comes under Canadian-controlled private corporations and others that don’t come under Canadian-controlled private corporations.

If Canadian-controlled private corporations are the trunk of a tree, other types of corporations are like their branches and twigs.

Basically, in Canada, Canadian-controlled private corporations always get in the limelight with several advantages on small business tax deduction. Other types of corporations do exist in Canada, including

  • Other Private Corporation
  • Public Corporation
  • Control by a Public Corporation

How to Reduce Corporate Tax

Canadian corporations have two ways to follow for reducing their Canadian income tax. These are:

Canadian corporations have two ways to reduce income tax amounts – by following what can earn them tax credits and using income tax deduction advantages.

1.      Earning Corporate Tax Credits

Investment Tax credits reduces the amount of income tax small businesses pay. Moreover, there are different types of Federal Tax Credits available, and small businesses need to claim the right one suitable for them.

Among all available corporate tax credits, Research and Development Tax Credits is known as the best one. However, a corporation is also eligible to get corporate tax credits for hiring apprentices, creating child care spaces or fishing or farming in some parts of Canada.

2.      Taking Advantage of Corporate Income Tax Deductions

Under Canadian-controlled private corporations claiming the Small Business Deduction, you can take advantage of corporate income tax deduction. Hiring a good corporate tax accountant in Oakville is the best way to know everything about business expenses, including tax deduction index lists. In fact, the corporate tax advisor in Oakville will also explain the rules for some common business deduction expenses such as legal fees, accounting and travel expenses.

Which Income Tax Form Your Corporation Should Use?

Considering the fact that corporations are separate legal entities, corporate tax filing follows different guidelines. These corporations operating in Canada need to complete and file T2 Corporate tax. Even if a corporation remains inactive, it has to file this T2 tax form. The only corporate tax and exemption apply to a corporation that is registered under charity throughout the year.

The followings are some criteria that a corporation needs to meet in order to complete and file a T2 Short Return:

  • It needs to be registered as a Canadian-controlled private corporation (CCPC) in the tax year
  • It exists in only one Canadian province or territory
  • It shows either no income or loss of income for the income tax year
  • It transacts in Canadian currency only
  • It has not dealt with any taxable dividends
  • It doesn’t claim any refundable tax credits (except the refund of installment payments)

OR ELSE

  • In the case of a tax-exempt corporation like a non-profit organization, it is necessary to show that it is permanently established only in one Canadian province or territory.

How To Prepare Corporate Income Tax Returns?

Compared to filing a T1 personal income tax return, the corporate income tax return is more complex, and hence, you need professional guidance.

If you don’t have an in-house accountant for your corporation, consider hiring a good corporate tax accountant in Burlington who can explain you from scratch. Looking for an outsourced tax accountant for your small business will save your time, money and energy. Nowadays, professional accountants and bookkeepers use cloud-based tax software to follow accurate taxation processes.

When to File Corporate Income Tax?

The income tax for your corporation needs to be filed no later than six months after the end of a fiscal year. So, for example, if December 31 is your year-end tax date, you need to file the corporate income tax return by June 30.

How to File Corporate Tax?

Almost all Canadian corporations, including non-resident corporations, file their corporate income tax return through Canada Revenue Agency’s Corporation Internet Filing page. There, you will find information about corporate tax filing.

Key Takeaways

There is no denying that corporate taxation is a major burden for small businesses. A minor mistake in the paperwork or documentation could cause a significant penalty. Above all, you need to stay up-to-date with the latest tax regulations and changes before tax filing. Therefore, you need to play the card safely. A professional tax accountant should handle your corporate taxation who can guide you to the best corporate tax deal.

June 7, 2021