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 $500K | CCPC Aggregate Investment Income (AII) | General Rate for all other income | |
Basic | 38% | 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 Tax | 10% | 38.67% | 15% |
Refundable Part I Tax | (30.67) | ||
Federal Tax after Dividend Refund | 10% | 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
- Fixed place of business (office, branch, factory, warehouse); or
- 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
- Active Business Income (ABI) earned in Canada
- Taxable Income
- $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
- Annual Business Limit is reduced by the following formula:
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:
- Aggregate Investment Income (AII)
- 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
- M&P Profits – Amount eligible for the SBD
- 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)