Corporate tax is a complex subject that should be discussed in detail with your lawyer or accountant.
As a separate entity, a corporation is subject to both federal and provincial tax. The income taxation of corporations and other available tax incentives depends on the type of corporation (i.e., public, private, Canadian-controlled private corporation (CCPC), not-for-profit (also known as non-profit), registered charity, etc.) and on the types of activities and income generated therefrom. If any of the corporation’s after-tax income is paid to its shareholders through a declared dividend, those dividends constitute income to the shareholders, which is subject to tax. In certain circumstances, dividends received by corporate shareholders can be received tax-free through an inter-corporate dividend.
Unlike an individual’s income tax, which have “progressive” rates (i.e. the rate of tax increases as income increases), corporations are subject to flat rates of tax. The rate depends only on the type of corporation and the source of income. Federally, the general net tax rate for corporations is 15% and 11% for Small Business that are Canadian-Controlled private corporations. The province has two rates of income tax, a lower rate and a higher rate: The lower rate sis 4.5% and the higher rate is 11%.
Individuals earning money through a corporation have a potential for “double taxation.” This is because the corporation pays tax, then gives a dividend to the individual shareholder, and then the individual pays tax again on the dividend. For Canadian corporations, tax laws attempt to minimize the effect of double taxation, by grossing up dividends in the individual’s return to the approximate amount earned before tax at the corporate level. A tax credit is then given to the shareholder to approximate the amount of tax previously paid by the corporation (the “dividend tax credit”).
The tax is never perfectly “integrated” and business income can often be saved through careful planning. If you are the sole shareholder, director, and president of the corporation, you may be able to choose, to some extent, how to compensate yourself out of business profits: for being the president, you could pay yourself an increased salary or a bonus; you could increase directors’ fees; you could increase dividends, or you could have the company buy back some of your shares. Each form of compensation is taxed differently, and by choosing a combination of the above methods, you may be able to save money.