Section Three: Taxation of Business Entities
The information contained in this section was accurate at the time of writing. However, taxation policies and rates frequently change with Federal and Provincial budgets. Therefore it is imperative to seek professional advice from an accountant, financial advisor or representative from Revenue Canada before making any final decisions based on this information.
Sole proprietorships are taxed on their net business income in a calendar year.
The sale of capital assets owned by the sole proprietorship are subject to capital gains or capital losses.
Income may not be deferred to subsequent years.
Losses can be carried back for up to three years or carried forward for ten years.
Losses incurred in a taxation year may be offset against other sources of income.
A partnership is not recognized as a separate entity in income tax law.
Net income earned by a partnership is distributed to its partners based on the partnership share.
Work-in-progress is not taxable.
Partnership losses allocated to the partner may be offset against other income earned by that individual.
1. Federal and Provincial Tax
The combined federal and provincial tax on the income of corporations is approximately 44 percent.
2. Active Business Income
The tax rate is reduced on active business income to approximately 23 percent on the first $200,000.00 of income.
Only Canadian controlled private corporations qualify for the reduction on the first $200,000.00 of their income.
Associated corporations must share the $200,000.00 small business deduction.
Income from a personal services business is excluded from active business and hence is taxed at the top corporate rate.
Specified investment business income is also excluded from active business income and does not qualify for the small business deduction.
One of the advantages of the active business income is that net after-tax profits retained in the corporation and not paid out as dividends to the shareholders may be kept indefinitely in the corporation. This creates a benefit in that taxes may be deferred on these retained earnings until such time as they are paid out as dividends.
3. Dividends to Shareholders
Dividends paid to the shareholders are taxed at the individual shareholders personal tax rates.
4. Canadian Controlled Private Corporation (CCPCs)
CCPCs that qualify for the small business deduction provide a substantial incentive for incorporation in that they are taxed at the rate of approximately 23 percent on the first $200,000.00 of active business income.
Other and sundry tax guidelines and policies affect the taxation and rates of corporation, Professional advice should be sought before reaching a decision regarding taxes for your company.