Federal Taxes Payable Calculation

Determining Whether a Corporation is Resident in Canada

Here is an overview of the federal tax calculation, below we will explain the components in detail:

 CCPC Active Business Income Eligible up to $500KCCPC Aggregate Investment Income (AII)General Rate for all other income
Basic38%38%38%
Provincial Abatement(10)(10)(10)
Small Business Deduction(18)  
Manufacturing & Processing (M&P) Deduction or General Rate Reduction  (13)
Additional Refundable Tax 10.67 
Total Federal Part I Tax10%38.67%15%
Refundable Part I Tax (30.67) 
Federal Tax after Dividend Refund10%8%15%
Step 1: Base Amount

The base amount of Part I tax is always 38% of Taxable Income ; it is the rate applied before any further deductions

Step 2: Provincial Abatement
  • Provincial Abatement = 10% * Taxable Income earned in a Canadian Province/Territory
  • This 10% deduction is meant to leave room for the provincial tax rates
  • A corporation earns income from a Canadian province if it has a Permanent Establishment in that Province
  • Permanent Establishment is based on having one of the following
    1. Fixed place of business (office, branch, factory, warehouse); or
    2. If the corporation carried on business in a province through an agent or an employee; and
      • that employee or agent had the authority to bind the corporation into a contract; or
      • that employee or agent held inventory owned by the corporation and filled orders regularly from that inventory
Step 3: Small Business Deduction (SBD) - Only for CCPC’s

The SBD is available only to corporations that are CCPC’s throughout the taxation year (cannot be a part year CCPC)

Formula

18% * the lesser of

  1. Active Business Income (ABI) earned in Canada
  2. Taxable Income
  3. $500,000 annual limit less amount of shared by associated corporations

Note that the $500,000 annual business limit must be shared among associated corporations

Large CCPC’s (Taxable Capital Employed In Canada > $10 Million)

  • To ensure that large CCPC’s do not get the Small Business Deduction, the annual limit of $500,000 is grinded down by a formula:
    • Annual Business Limit is reduced by the following formula:
      • 500,000 * B/$11,250
      • Where B= (Taxable Capital Employed In Canada in Previous Year – $10 Million) * 0.225%
    • Therefore, per this formula, anytime previous year’s taxable capital employed in Canada is more than $10 million, the small business deduction will start to grind down
    • A corporation with Taxable Capital Employed in Canada of $15 Million or more will get NO SBD
    • Therefore if previous year’s taxable capital employed in Canada is $11 million; the small business deduction limit will be $400,000

Taxable Capital Employed in Canada = Liabilities + Shareholders’ Equity less debt and equity investments in other corporations.

Please see our active business income notes to see the definition..

Step 4: Additional Refundable Tax (ART) – Only applies to CCPC’s

Formula
10 2/3% * the lesser of:

  1. Aggregate Investment Income (AII)
  2. Taxable Income – Amount Eligible for the SBD

Aggregate Investment Income (AII) include:

  • Interest
  • Foreign Dividends (not dividends from Canadian resident corporations)
  • Rent
  • Royalties
  • Net Taxable Capital Gains less Net Capital Loss carryover deducted during the year
Step 5: Manufacturing and Processing (M&P) Deduction

Formula
13% * the lesser of

  1. M&P Profits – Amount eligible for the SBD
  2. Taxable Income – Amount Eligible for the SBD – Aggregate Investment Income (AII)

Benefits of M&P Deduction

  • Because the general rate reduction = M&P deduction; there is no added benefit of M&P deduction
  • Some Provinces provide better tax rates on M&P income; therefore, you may be able to save money at the provincial level
    • In Ontario, Corporations get an additional 1.5% reduction on provincial tax rates on M&P Income
Step 6: General Rate Reduction

Formula

General Rate Reduction equals to:

= 13% * (Taxable Income – Amount Eligible for SBD – Aggregate Investment Income – Amount Eligible for M&P deduction)

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