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Income Tax in Canada


Income taxes in Canada constitute the majority of the annual revenues of the Government of Canada, and of the governments of the Provinces of Canada. In the fiscal year ending 31 March 2015, the federal government collected nearly three and a half times more revenue from personal income taxes than it did from corporate income taxes.

Tax collection agreements enable different governments to levy taxes through a single administration and collection agency. The federal government collects personal income taxes on behalf of all provinces and territories except Quebec and collects corporate income taxes on behalf of all provinces and territories except Alberta and Quebec. Canada's federal income tax system is administered by the Canada Revenue Agency (CRA).

Canadian federal income taxes, both personal and corporate are levied under the provisions of the Income Tax Act. Provincial and territorial income taxes are levied under various provincial statutes.

The Canadian income tax system is a self-assessment regime. Taxpayers assess their tax liability by filing a return with the CRA by the required filing deadline. CRA will then assess the return based on the return filed and on information it has obtained from employers and financial companies, correcting it for obvious errors. A taxpayer who disagrees with CRA's assessment of a particular return may appeal the assessment. The appeal process starts when a taxpayer formally objects to the CRA assessment. The objection must explain, in writing, the reasons for the appeal along with all the related facts. The objection is then reviewed by the appeals branch of CRA. An appealed assessment may either be confirmed, vacated or varied by the CRA. If the assessment is confirmed or varied, the taxpayer may appeal the decision to the Tax Court of Canada and then to the Federal Court of Appeal.

Individuals resident in Canada for only part of a year are taxable in Canada on worldwide income only for the period during which they were resident.

Personal tax credits, miscellaneous tax credits, and the dividend tax credit are subtracted from tax to determine the federal tax liability.

Personal income tax rates:

2017 federal tax rates are as follows:

Federal taxable income (CAD*)
Tax on excess (%)
Over
Not Over

0
45,916
15.0
45,916
91,831
20.5
91,831
142,353
26.0
142,353
202,800
29.0
202,800

33.0

* Canadian dollars

Provincial/territorial income taxes:

In addition to federal income tax, an individual who resides in, or has earned income in, any province or territory is subject to provincial or territorial income tax. Except in Quebec, provincial and territorial taxes are calculated on the federal return and collected by the federal government. Rates vary among the jurisdictions. Two provinces also impose surtaxes that may increase the provincial income taxes payable. Provincial and territorial taxes are not deductible when computing federal, provincial, or territorial taxable income.

All provinces and territories compute income tax using 'tax-on-income' systems (i.e. they set their own rates, brackets, and credits). All except Quebec use the federal definition of taxable income.

The following table shows the top 2017 provincial/territorial tax rates and surtaxes. The provincial/territorial tax rates are applicable starting at the taxable income levels shown below. Surtax rates apply to provincial tax above the surtax thresholds shown.

Recipient
Provincial/territorial tax
Provincial/territorial surtax

Top rate (%)
Taxable income (CAD)
Rate (%)
Threshold (CAD)
Alberta
15.0
303,900
N/A
N/A
British Columbia
14.7
108,460
N/A
N/A
Manitoba
17.4
68.005
N/A
N/A
New Brunswick
20.3
152,100
N/A
N/A
Newfoundland and Labrador
18.3
179,214
N/A
N/A
Northwest Territories
14.05
135,219
N/A
N/A
Nova Scotia
21.0
150,000
N/A
N/A
Nunavut
11.5
142,353
N/A
N/A
Ontario
13.16
220,000
20 and 56 (1)
4,556 and 5,831
Prince Edward Island
16.7
63,969
10
12500
Quebec (2)
25.75
103,915
N/A
N/A
Saskatchewan
14.75
129,214
N/A
N/A
Yukon
15.0
500,000
N/A
N/A
Non-resident
15.84 (3)
202,800
N/A
N/A

Notes

1.      Ontario levies 20% surtax on provincial tax exceeding CAD 4,556 and an additional 36% on provincial tax exceeding CAD 5,831.
2.      Quebec has its own personal tax system, which requires a separate calculation of taxable Income. Recognising that Quebec collects its own tax, federal income tax is reduced by 16.5% of basic federal tax for Quebec residents.
3.      Instead of provincial or territorial tax, non-residents pay an additional 48% of basic federal tax on income taxable in Canada that is not earned in a province or territory. Non-residents are subject to provincial or territorial rates on employment income earned, and business income connected with a permanent establishment, in the respective province or territory. Different rates may apply to non-residents in other circumstances.

Combined federal/provincial (or federal/territorial) effective top marginal tax rates for 2017 are shown below. The rates reflect 2017 federal, provincial, and territorial budgets (which usually are introduced in the spring of each year). The rates include all provincial/territorial surtaxes, and apply to taxable incomes above CAD 202,800 in all jurisdictions except:

·        CAD 303,900 in Alberta.
·        CAD 220,000 in Ontario.
·        CAD 500,000 in Yukon.

Recipient
Highest federal/provincial (or territorial) tax rate (%)

Interest and ordinary income
Capital gains
Canadian dividends



Eligible (1)
Non-eligible (1)
Alberta
48.0
24.0
31.7
41.3
British Columbia
47.7
23.9
31.3
40.9
Manitoba
50.4
25.2
37.8
45.7
New Brunswick
53.3
26.7
33.5
46.3
Newfoundland and Labrador
51.3
25.7
42.6
43.6
Northwest Territories
47.1
23.5
28.3
35.7
Nova Scotia
54.0
27.0
41.6
47.0
Nunavut
44.5
22.3
33.1
36.3
Ontario
53.5
26.8
39.3
45.3
Prince Edward Island
51.4
25.7
34.2
43.9
Quebec (2)
53.3
26.7
39.8
43.8
Saskatchewan
47.8
23.9
30.3
39.6
Yukon
48.0
24.0
24.8
40.2
Non-resident
48.8
24.4
36.7
38.9

Notes

1.      See Dividend income in the Income determination section for more information on eligible and non-eligible dividends.
2.      Non-resident rates for interest and dividends apply only in limited circumstances. Generally, interest (other than most interest paid to arm's-length non-residents) and dividends paid to non-residents are subject to Canadian withholding tax (WHT).

Alternative Minimum Tax (AMT):

In addition to the normal tax computation, individuals are required to compute an adjusted taxable income and include certain 'tax preference' items that are otherwise deductible or exempt in the calculation of regular taxable income. If the adjusted taxable income exceeds the minimum tax exemption of CAD 40,000, a combined federal and provincial/territorial tax rate of about 25% is applied to the excess, yielding the AMT. The taxpayer then pays the greater of regular tax or the AMT. Taxpayers required to pay the AMT are entitled to a credit in future years, when their regular tax liability exceeds their AMT level for that year.

Kiddie tax:

A minor child that receives certain passive income under an income splitting arrangement is subject to tax at the highest combined federal/provincial (or territorial) marginal rate (i.e. up to 54%), referred to as 'kiddie tax'. Personal tax credits, other than the dividend tax credit and foreign tax credits, cannot be claimed to reduce the kiddie tax.

Income determination:

Employment income:

Salaries, wages, commissions, directors' fees, and all other remuneration received by an officer or employee are included in income from employment. Canadian residents are taxable on worldwide income, whether remitted in Canada or not. Most fringe benefits (e.g. interest-free or low-interest loans) received or enjoyed in connection with employment are also taxed as employment income. Foreigners working temporarily or permanently in Canada are eligible for special concessions for employment at a special work site or remote location. The rules exempt from tax most amounts received as allowances for board and lodging, as well as transportation between the special work site and the employee's principal place of residence.

Employer contributions to a registered pension plan or deferred profit sharing plan will be taxed when the employee receives a distribution from the plan.

A non-resident of Canada is subject to a 25% WHT on plan withdrawals. The plan administrator is responsible for withholding and remitting this tax. However, a non-resident individual can elect to have the withdrawal taxed at graduated rates. In certain circumstances, this election enables the taxpayer to withdraw the funds tax-free up to an annual threshold, which is usually the personal tax credit for the year. The 25% rate may also be reduced under the provisions of an income tax treaty.



Employee Profit Sharing Plans (EPSPs):

A 'specified employee' (generally an employee who has a significant interest in, or does not deal at arm’s length with, the employer) is subject to a special tax on the portion of an employer’s EPSP contribution, allocated by the trustee to the employee, that exceeds 20% of the employee’s salary received in the year from the employer. The tax rate will equal the top combined marginal rate of the province or territory in which the employee resides (except for Quebec residents, for whom the tax rate will equal the top federal marginal tax rate, which is 33%, starting 2016 taxation years).

Equity compensation:

Employees who exercise options to acquire shares of their employer corporation (or a related corporation) will be considered in receipt of a benefit in the year of exercise, based on the difference between the market value of the shares on the date of purchase and the total price paid to acquire the options and the shares themselves. In most cases, 50% of this benefit (25% for Quebec tax purposes, except for options of small- or medium-sized businesses conducting innovative activities, and for options granted after 21 February 2017, in shares of public corporations with at least CAD 10 million payroll in Quebec) is deductible from taxable income. As a result, only half of this benefit (75% for Quebec tax purposes if none of the above exceptions apply) is included in income.

Employees who cash out their stock option rights will be eligible for the stock option deduction only if their employer makes an election to forgo deducting the cash payment from its income. The cost of the shares to the employee for capital gains purposes is the market value of the shares on the day the option is exercised. Any capital gain or loss accruing after the date of exercise will arise only on the ultimate disposition of the shares. An exception is provided for stock options of Canadian-controlled private corporations (CCPCs) granted to employees of CCPCs, which are not subject to tax until the employee disposes of the underlying shares.

Business income:

Business income for self-employed individuals includes most income earned from any activity that is intended to be carried on for profit. Evidence must exist to support this intention. It does not include employment income.

Loss relief is available for self-employed individuals. Business losses from self-employment can be offset against income from the self-employment. Business losses can be carried back for a period of three years and carried forward for a period of 20 years.

Billed-basis accounting:

Taxpayers in certain designated professions (accountants, dentists, lawyers, medical doctors, veterinarians, and chiropractors) may elect to exclude the value of work in progress in computing their income. This election effectively allows such taxpayers to defer tax by deducting costs associated with work in progress in advance of the matching revenue inclusion.

For taxation years that begin after 21 March 2017, draft legislation restricts the ability of these taxpayers to deduct the cost of work in progress in computing income, subject to a transitional period. As a result, the lower of the cost and the fair market value of work in progress will gradually be included in income over five years. For these purposes, the fair market value of work in progress at the end of a year is considered to be the amount that can reasonably be expected to become receivable in respect thereof after the end of that year.

Capital gains:

Half of a capital gain constitutes a taxable capital gain, which is included in the individual's income and taxed at ordinary rates.

No special concessions are available to short-term residents with respect to the taxation of capital gains. However, a step-up in the cost base is available to new residents of Canada, which may reduce the amount of capital gains otherwise subject to tax.

The purchaser of taxable Canadian property is generally required to withhold tax from the proceeds paid to a non-resident vendor, unless the non-resident vendor has obtained a clearance certificate.

Taxable Canadian property of a taxpayer includes, among other things:

·        Real estate situated in Canada.
·        Both capital and non-capital property used in carrying on a business in Canada.
·        In general, shares in a corporation that are listed on a stock exchange if, at any time in the preceding 60 months:
o   25% or more of the shares of the corporation are owned by the taxpayer or persons related to the taxpayer, and
o   more than 50% of the fair market value of the shares is derived from real property situated in Canada, Canadian resource properties, and timber resource properties.
·        In general, shares in a corporation that are not listed on a stock exchange if, at any time in the preceding 60 months, more than 50% of the fair market value of the shares is derived directly or indirectly from property similar to that described above for shares of a public corporation.

However, in specific situations the disposition by a non-resident of a share or other interest that is not described above may be subject to Canadian tax (e.g. when a share is deemed to be taxable Canadian property).

Capital gains reserve:

When capital property is sold at a profit in the year or in a previous year, a reserve can be claimed on any proceeds that are not due until after the year end. The reserve equals the portion of the gain related to the sale proceeds that are not due until after the end of the year. The reserve mechanism can be used to spread gains over a maximum of five years on most types of capital property. Amounts brought into income each year under the reserve mechanism are treated as capital gains. A reserve cannot be claimed if the taxpayer was not resident in Canada at the end of the year or at any time in the immediately preceding year.

Capital gain on sale of residence:

A gain realised on the sale of an individual's home (principal residence) is exempt from tax in most instances. A loss is not deductible. Generally, a capital gain realised on the sale of a principal residence will be fully exempt from tax only if the taxpayer has been resident in Canada and has occupied the home during all the years of ownership (or all years except one, known as the 'one-plus' rule, which is intended to ensure that an individual who, in the same year, disposes of a home and acquires a replacement residence is not precluded from designating both properties as a principal residence). Only one principal residence per family unit in a tax year is eligible for this treatment.

Special rules permit resident taxpayers who temporarily rent their home to others to elect to continue to treat it as a principal residence for a further period. Generally, the period is up to four years, but it can be extended if the taxpayer is temporarily transferred by the employer and eventually returns to the same residence.

A change in the CRA’s administrative position means that individuals who sell their principal residence in 2016 or later years must report the sale (i.e. date of acquisition, proceeds of disposition, and a description of the property) and the principal residence designation on their income tax returns to claim the full principal residence exemption.

For dispositions of residential property after 2 October 2016, draft legislation eliminates the 'one-plus' rule (see above) if the purchaser of Canadian residential real estate was not resident in Canada during the year the property was purchased. As a result, non-residents who acquire residential properties in Canada can no longer claim a portion of the principal residence exemption to shelter gains on a later sale.

Assessments and reassessments:

For taxation years ending after 2 October 2016, draft legislation allows the CRA to reassess tax, after the end of the normal reassessment period (three years after the date of the initial notice of assessment, for most taxpayers), on a gain from the disposition of real or immovable property if the taxpayer does not initially report the disposition.

Capital gains exemption:

A lifetime capital gains exemption allows a Canadian-resident individual to realise, tax free:

·        up to CAD 835,716 for 2017 (indexed thereafter) in capital gains on the disposition of shares of a qualifying small business corporation, and
·        up to CAD 1 million for dispositions of qualified farm and fishing properties.

An individual resident in Canada for only part of the year may be eligible to claim the exemption if that individual was a resident of Canada throughout the immediately preceding or following year.

Dividend income:

For 2017, non-eligible and eligible dividends from Canadian corporations are grossed up by 17% and 38%, respectively, for inclusion in income. A federal tax credit can then be claimed for 10.52% (non-eligible) or 15.02% (eligible) of the grossed-up dividend, in addition to a provincial or territorial tax credit.

Draft legislative proposals increase personal taxes on non-eligible dividends after 2017, as follows:

Non-eligible dividends
2017
2018
After 2018
Dividend gross up
17%
16%
15%
Federal dividend tax credit (on grossed-up dividends)
10.52%
10.03%
9.03%
Top federal rate
26.30%
26.64%
27.57%

Eligible dividends must be designated as such by the payer. Dividends generally will be eligible dividends if the corporation that pays them is resident in Canada and either is a public corporation or is not a CCPC. However, these corporations will pay non-eligible dividends in certain cases (e.g. if they received non-eligible dividends). Dividends from CCPCs will be eligible or non-eligible depending on the source of the dividends paid.

A non-resident's Canadian-source dividends are subject to WHT of 25%. That income is not subject to graduated rates. The 25% WHT, which is deducted at source, may be reduced under an income tax treaty to rates ranging from 5% to 20%.

Interest income:

Interest income is taxed as ordinary income, regardless of whether or not the interest is derived from a source in Canada. Accrued interest income on most debt obligations must be reported annually.

A non-resident's Canadian-source interest (except for most interest paid to arm's-length non-residents) is subject to WHT of 25%. That income is not subject to graduated rates. The 25% WHT, which is deducted at source, may be reduced under an income tax treaty to rates ranging from 0% to 18%.

Rental income:

Rental income is generally taxed as ordinary income.

A non-resident's Canadian-source rental income is subject to WHT of 25%. For real estate rentals that do not constitute income from carrying on a business, a non-resident can elect to be taxed on the net income from these sources at the graduated tax rates that apply to residents. However, the availability of personal and other tax credits to individuals electing to file on this basis is restricted. Any excess tax withheld is refundable to the non-resident. If an election is made, the non-resident can also file an undertaking that results in WHT being levied on only the net income from these sources.

Individuals working temporarily in Canada often have rental income from renting out their foreign home while in Canada. Deductions for expenses incurred to maintain the foreign house are allowed in determining the portion of rental income subject to the graduated tax. Canadian tax law, however, limits the amount of capital cost allowance (i.e. tax depreciation) that can be deducted to the amount required to reduce the rental income to zero. This ensures that a rental loss cannot be created by claiming capital cost allowance. If rental expenses, except for capital cost allowance, exceed rental income, the loss generally may be offset against the individual's other income, provided certain conditions are satisfied. The deductibility of rental losses against other income may be restricted if there is no reasonable expectation of a profit from the rental property.

Foreign accrual property income (FAPI):

Individuals resident in Canada are taxed on certain investment income (FAPI) of controlled foreign affiliates as it is earned, whether or not distributed. A grossed-up deduction is available for foreign income or profits taxes and WHTs paid in respect of the income. A foreign corporation is considered to be a foreign affiliate of a Canadian individual if the Canadian individual owns, directly or indirectly, at least 1% of any class of the outstanding shares of the foreign corporation and the Canadian individual, alone or together with related persons, owns, directly or indirectly, at least 10% of any class of the outstanding shares of that foreign corporation. The foreign affiliate will be a controlled foreign affiliate if certain conditions are met (e.g. more than 50% of the voting shares are owned, directly or indirectly, by a combination of the Canadian individual, persons at non-arm’s length with the Canadian individual, a limited number of Canadian resident shareholders, and persons at non-arm’s length with such Canadian resident shareholders).

Non-resident trusts (NRTs):

An NRT will generally be deemed to be resident for Canadian tax purposes if (i) it has Canadian resident contributors or (ii) certain former Canadian residents have contributed to an NRT that has Canadian resident beneficiaries. However, an election can be filed to deem the creation of a separate notional trust for tax purposes, referred to as a ‘non-resident portion trust’. Canadian tax will apply only to the income or gains from the properties held by the trust that are not included in the non-resident portion trust. Properties included in the non-resident portion trust are those that have not been contributed directly or indirectly by a Canadian resident or certain former Canadian residents (or property substituted for those properties or income derived from those properties). Many direct or indirect transfers or loans of property or services can be deemed to be contributions to an NRT.

An NRT will also be deemed to be resident in Canada if a Canadian-resident taxpayer transfers or lends property to the trust (regardless of the consideration received) and the property held by the trust may revert to the taxpayer, pass to persons to be determined by the taxpayer, or be disposed of only with the taxpayer’s consent.

Offshore investment funds:

The offshore investment fund rules affect Canadian residents that have an interest as a beneficiary in these funds. If the rules apply, the taxpayer will be required to include in its income an amount generally determined as the taxpayer’s cost of the investment multiplied by a prescribed income percentage (i.e. the prescribed rate of interest plus 2%) less any income received from the investment. Also, for certain non-discretionary trust funds in which a Canadian-resident person, and persons that do not deal at arm's length with the person, have interests in aggregate of 10% or more of the total fair market value of the total interests in the trusts, the trust is deemed to be a controlled foreign affiliate of the Canadian beneficiary and is thereby subject to the Canadian FAPI rules.

Taxation of ‘switch fund’ shares:

Mutual fund (and investment) corporations can issue multiple classes of shares. Some corporations are structured so that each share class tracks a different investment strategy and pool of assets, referred to as a fund. The corporate rollover rules allow an investor in one fund to switch to another fund within the same corporation that tracks a different investment strategy without recognising accrued gains on the original investment.

Starting 1 January 2017, exchanges or other dispositions of a class of shares of a mutual fund corporation for another class of shares of the same corporation and each class represents a different ‘investment fund’, may be treated as a disposition at fair market value. This will not apply to switches when the shares received differ only in respect of management fees or expenses to be borne by investors and otherwise derive their value from the same portfolio within the corporation.

Sale of ‘linked notes’

Linked notes are a type of investment whereby a taxpayer is entitled to a return on its original investment that is contingent on the performance of a referenced asset, such as a basket of stocks, a market index, a commodity, a currency, or units of a fund. Investors often take the position that the accrued return on a linked note is not taxable until maturity. Investors who treat the notes on capital account can, by selling before maturity, convert their accrued but unrealised return from fully taxed income to a capital gain taxed at 50%.

For sales of linked notes occurring after 2016, any accrued but unrealised increase in the value of a linked note will be:

·        deemed to be accrued interest for purposes of the prescribed debt obligations rules, and
·        included in income at the time of disposition.



Income not taxed:

The following types of income are not taxed in Canada (this list is not exhaustive):

·        gifts and inheritances;
·        death benefits paid from a life insurance policy;
·        lottery winnings;
·        winnings from betting or gambling for simple recreation or enjoyment;
·        strike pay;
·        income earned within a Tax-Free Savings Account;
·        compensation paid by a province or territory to a victim of a criminal act or a motor vehicle accident*;
·        certain civil and military service pensions;
·        income from certain international organizations of which Canada is a member, such as the United Nations and its agencies;
·        war disability pensions;
·        RCMP pensions or compensation paid in respect of injury, disability, or death*;
·        income of First Nations, if situated on a reserve;
·        capital gain on the sale of a taxpayer’s principal residence;
·        provincial child tax credits or benefits and Qu├ębec family allowances;
·        Working income tax benefit;
·        the Goods and Services Tax or Harmonized Sales Tax credit (GST/HST credit), Quebec Sales Tax credit or Saskatchewan Sales Tax Credit; and
·        the Canada Child Tax Benefit.

Note that, the method by which these forms of income are not taxed can vary significantly, which may have tax and other implications; some forms of income are not declared, while others are declared and then immediately deducted in full. Some of the tax exemptions are based on statutory enactments, others (like the non-taxability of lottery winnings) are based on the non-statutory common law concept of "income". In certain cases, the deduction may require off-setting income, while in other cases, the deduction may be used without corresponding income. Income which is declared and then deducted, for example, may create room for future Registered Retirement Savings Plan (RRSP) deductions. But then the RRSP contribution room may be reduced with a pension adjustment if you are part of another plan, reducing the ability to use RRSP contributions as a deduction.

Deductions which are not directly linked to non-taxable income exist, which reduce overall taxable income. A key example is RRSP contributions, which is a form of tax-deferred savings account (income tax is paid only at withdrawal, and no interim tax is payable on account earnings).

*Quebec changed its rules in 2004 and, legally, this may be taxed or may not – Courts have yet to rule.

Tax administration:

Taxable period:

The tax year for an individual in Canada is the calendar year.

Tax returns:

In most cases, taxpayers must file tax returns by 30 April of the following year. Married taxpayers file separately; joint returns are not allowed. The filing deadline is extended to 15 June if the individual, or the individual's spouse, carried on an unincorporated business. There is no provision for any extension of these filing deadlines, unless they fall on a weekend, in which case the filing deadline is usually extended to the next business day.

Residents in Canada who own foreign investment properties whose total cost exceeds CAD 100,000 must file an information return (Form T1135) each year they own such properties. Exceptions apply to certain types of assets, such as those held in a foreign pension plan. The filing deadline is the same as for the individual tax return. If the total cost of the taxpayer’s foreign property is less than CAD 250,000 throughout the taxation year, the taxpayer can report the property using the streamlined information reporting requirements on Form T1135.

Individuals are also required to file an information report for certain assets held at the time they cease to be a Canadian resident if the total market value of the assets exceeds CAD 25,000. This report must be filed with the Canadian tax return for the year that they cease residency. This reporting is separate from the reporting of assets subject to deemed disposition upon the cessation of Canadian residence.

Payment of tax:

Income tax is withheld from salaries. Any balance of tax owed is due 30 April of the following year. Individuals are required to pay quarterly instalments if their tax payable exceeds amounts withheld at source by more than CAD 3,000 (CAD 1,800 for Quebec residents) in both the current and either of the two previous years.

Corporate - Taxes on corporate income:

As a general rule, corporations resident in Canada are subject to Canadian corporate income tax (CIT) on worldwide income. Non-resident corporations are subject to CIT on income derived from carrying on a business in Canada and on capital gains arising upon the disposition of taxable Canadian property (See Capital gains in the Income determination section for more information). The purchaser of the taxable Canadian property is generally required to withhold tax from the amount paid unless the non-resident vendor has obtained a clearance certificate.

Canadian CIT and withholding tax (WHT) can be reduced or eliminated if Canada has a treaty with the non-resident's country of residence. A list of treaties that Canada has negotiated is provided in the Withholding taxes section, along with applicable WHT rates.

Federal income tax:

The following rates apply for 31 December 2017 year-ends. For non-resident corporations, the rates apply to business income attributable to a permanent establishment (PE) in Canada. Different rates may apply to non-resident corporations in other circumstances. Non-resident corporations may also be subject to branch tax (see the Branch income section).


Federal Rate (%)
Basic rate
38.0
Less: Provincial abatement (1)
(10.0)
Federal rate
28.0
Less: General rate reduction or manufacturing and processing deduction (2)
(13.0)
Net federal tax rate (3, 4)
15.0

Notes

·        The basic rate of federal tax is reduced by a 10% abatement to give the provinces and territories room to impose CITs. The abatement is available in respect of taxable income allocated to Canadian provinces and territories. Taxable income allocable to a foreign jurisdiction is not eligible for the abatement and normally is not subject to provincial or territorial taxes.
·        The general rate reduction and manufacturing and processing deduction do not apply to the first CAD 500,000 of active business income earned in Canada by Canadian-controlled private corporations (CCPCs), investment income of CCPCs, and income from certain other corporations (e.g. mutual fund corporations, mortgage investment corporations, and investment corporations) that may benefit from preferential tax treatment.
·        Provincial or territorial taxes apply in addition to federal taxes. Provincial and territorial tax rates are noted below.
·        For small CCPCs, the net federal tax rate is levied on active business income above CAD 500,000; a federal rate of 10.5% applies to the first CAD 500,000 of active business income (proposed to decrease to 10% on 1 January 2018, and 9% on 1 January 2019). Investment income (other than most dividends) of CCPCs is subject to the federal rate of 28%, in addition to a refundable federal tax of 10⅔%, for a total federal rate of 38⅔%.

Provincial/territorial income tax:

All provinces and territories impose income tax on income allocable to a PE in the province or territory. Generally, income is allocated to a province or territory by using a two-factor formula based on gross revenue and on salaries and wages. Provincial and territorial income taxes are not deductible for federal income tax purposes. The rates given apply to 31 December 2017 year-ends and do not take into account provincial tax holidays, which reduce or eliminate tax in limited cases.

Province/territory
Income tax rate (%) (1, 2)
Alberta
12.0
British Columbia
11.0
Manitoba
12.0
New Brunswick
14.0
Newfoundland and Labrador
15.0
Northwest Territories
11.5
Nova Scotia
16.0
Nunavut
12.0
Ontario (3)
11.5 or 10.0
Prince Edward Island
16.0
Quebec (4)
11.8
Saskatchewan (5,6)
11.75 or 9.75
Yukon (7)
13.49 or 2.5

Notes

1.      When two rates are indicated, the lower rate applies to manufacturing and processing income.
2.      In all provinces and territories, the first CAD 500,000 (CAD 450,000 in Manitoba; CAD 600,000 in Saskatchewan after 2017) of active business income of a small CCPC is subject to reduced rates that range from 0% to 8%, depending on the jurisdiction.
3.      The lower Ontario rate applies to profits from manufacturing and processing, and from farming, mining, logging, and fishing operations, carried on in Canada and allocated to Ontario. Corporations subject to Ontario income tax may also be liable for corporate minimum tax (CMT) based on adjusted book income. The CMT is payable only to the extent that it exceeds the regular Ontario income tax liability. The CMT rate is 2.7% and applies when total assets are at least CAD 50 million and annual gross revenue is at least CAD 100 million on an associated basis.
4.      Quebec’s rate decreased from 11.9% to 11.8% on 1 January 2017, and will decrease to 11.7% on 1 January 2018, to 11.6% 1 January 2019, and to 11.5% on 1 January 2020.
5.      Saskatchewan’s general rate decreased from 12% to 11.5% on 1 July 2017, and will revert back to 12% on 1 January 2018; the decrease from 11.5% to 11% on 1 July 2019 has been cancelled.
6.      The minimum rate that applies to Saskatchewan’s manufacturing and processing profits decreased from 10% to 9.5% on 1 July 2017, and will revert back to 10% on 1 January 2018; the decrease from 9.5% to 9% on 1 July 2019 has been cancelled. The manufacturing and processing reduction from the general rate is determined by multiplying the maximum rate reduction (2%) by the corporation’s allocation of income to Saskatchewan.

7.      Yukon’s general rate decreases from 15% to 12% on 1 July 2017.





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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.


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This blog is Created by CA Anil Kumar Jain.