Corporate Taxes: How Do They Work In Canada?
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06 Feb 2024
Your corporation is a separate legal entity, which can have its own rights and obligations. It can enter into contracts, open bank accounts, and conduct business in its own name. Again, it means that your personal assets are protected if something happens to your company.
LCGE is a valuable tax benefit available to Canadian residents who sell shares of their small corporation.
By selling qualified small business corporation shares (QSBCS), you can exempt a portion of the capital gain from tax, resulting in significant tax savings.
Thus, it means there can be more money in your pocket if you ever decide to sell your incorporated business rather than an unincorporated one.
There might be a few conditions, but they commonly apply to many incorporated small business owners in Canada. Consult a Chartered professional accountant Surrey to learn more.
Note: These are just the federal tax rates. Provincial corporate tax rates may also apply in addition to the federal rates, depending on the location of Emma's bakery.
We hope as a small business owner exploring incorporation, you would have some clarity on the question “How do corporate taxes work in Canada?”
As an owner of the incorporated business, you are allowed to draw a salary and dividend, and there are tax implications.
Even though incorporation is beneficial for those wanting to expand, there are some limitations too. For instance, there will be increased administration, loss of personal tax credits, difficulty using losses, and potential tax pitfalls like inadequate planning, passive income limits, and a threat of corporate assets for personal use.
For any professional help (which you must seek), CJCPA can help. It is a Corporate Tax filing Canada firm with a combined experience of 30+ years. It has helped over 100s of small business owners in Canada incorporate their business while also increasing their tax savings.
Don’t forget to book your FREE 30-minute Consultation for incorporating a small business in BC for an unbiased opinion.
Stay tuned for more such business insights!
Corporate Taxes: How Do They Work In Canada?
While taxes may not be of interest to everyone, it is crucial to understand how they work, especially when it comes to your business earnings. After all, it’s your hard-earned money, isn’t it? Not to forget, it is also that time of the year when many small business owners like you are closing their books. The time of tax planning for 2024 has begun! This is why, in this blog, we’ll be focusing on how corporate tax works in Canada, and in what ways it will impact your small business.. Before you begin, make sure to book your FREE 30-minute Consultation with a CPA in Surrey Canada from CJCPA. Stay ahead of your finances with early tax planning!Your Corporation Is A Separate Being, Complete With Its Own Financial DNA
FAQ: What do we mean by incorporating a business?
When you incorporate your business, you create a distinct legal entity, the same as your business, where it has its own identity, separate from you. This new entity possesses its own rights, and obligations, and is responsible for paying taxes separately from you, the owner. You might be an independent contractor, freelancer, or sole proprietor of a retail business. In similar situations, if your business is growing, you will likely want to consider incorporation. Here’s Why ????Limited Liability
In case of any legal or financial issues, you/the shareholder/ business owner would not be held responsible personally. Your debt would be limited to an amount. It simply means that your personal assets will be safe if something happens to the company.Tax Advantages
Corporations may benefit from tax advantages compared to sole proprietorships. After incorporating a business, you can seek tax advantages such as income splitting, lower tax rates on active business income, and the flexibility to choose between receiving income as dividends or salary, which can result in overall tax savings for the small business owner in Canada.Legal Entity
Your corporation is a separate legal entity, which can have its own rights and obligations. It can enter into contracts, open bank accounts, and conduct business in its own name. Again, it means that your personal assets are protected if something happens to your company.
FAQ: How do I turn my small business into a corporation?
If you incorporate a small business in Canada, you’ll have to choose a jurisdiction, confirm its legal status, pick a name, create articles of incorporation, and establish the initial registered office address and board of directors. Hire a chartered professional accountant in Canada to learn more!Business Thrives, Tax Burden Plummets: Other Benefits Of Incorporating Your Business In Canada
The advantages of incorporation aren’t limited to separation of identity and limited liability in case of legal/ financial situations. There are many tax benefits of incorporating in Canada too. Here’s what you can expect:Reduced Tax Rates
The small business tax rate in Canada is significantly low, although each province and territory has its own corporate tax rate. For example, many eligible businesses pay only 9% federal tax on the first $500,000 of active business income. Thus, it simply means that more money will stay in the business for growth and investment. For small business owners like you, it will give ample opportunities for expanding your business. As long as the money is in the business, you’ll have to pay less tax for your business, and you can make a strategic withdrawal as per the tax efficiency.Lifetime Capital Gains Exemption
LCGE is a valuable tax benefit available to Canadian residents who sell shares of their small corporation.
By selling qualified small business corporation shares (QSBCS), you can exempt a portion of the capital gain from tax, resulting in significant tax savings.
Thus, it means there can be more money in your pocket if you ever decide to sell your incorporated business rather than an unincorporated one.
There might be a few conditions, but they commonly apply to many incorporated small business owners in Canada. Consult a Chartered professional accountant Surrey to learn more.
How Do You Calculate Income Tax On A Corporation In Canada?
Now that we have covered the basics, it's time to dive deeper into “How Corporate Taxes Work in Canada?”. We’ll take a look at the basics of how the taxable income of your business is determined. Let’s take the example of Emma, an entrepreneur running Emma's Bakery in Surrey, BC. We’ll see how the corporate taxes apply to her business.| Income Type | Tax Rate | Description |
| Active Business Income (First $500,000) | 9% (Federal) | Income generated from Emma's bakery's day-to-day operations, such as selling pastries and coffee. |
| Active Business Income (Above $500,000) | 15% (Federal) | Applies to active business income exceeding the $500,000 threshold. |
| Investment Income (Interest, Dividends, Capital Gains) | 28% (Federal) + 10⅔% (Refundable) | Income earned from investments held by the bakery, such as stocks or bonds. |
| Dividends Received by Emma | Tax-free | Dividends paid from the bakery to Emma are generally not taxed in her hands, promoting the integration of corporate and personal income taxes. |
Wrapping Up!
We hope as a small business owner exploring incorporation, you would have some clarity on the question “How do corporate taxes work in Canada?”
As an owner of the incorporated business, you are allowed to draw a salary and dividend, and there are tax implications.
Even though incorporation is beneficial for those wanting to expand, there are some limitations too. For instance, there will be increased administration, loss of personal tax credits, difficulty using losses, and potential tax pitfalls like inadequate planning, passive income limits, and a threat of corporate assets for personal use.
For any professional help (which you must seek), CJCPA can help. It is a Corporate Tax filing Canada firm with a combined experience of 30+ years. It has helped over 100s of small business owners in Canada incorporate their business while also increasing their tax savings.
Don’t forget to book your FREE 30-minute Consultation for incorporating a small business in BC for an unbiased opinion.
Stay tuned for more such business insights!
