Canada Accounting Questions Answered

What is the corporate tax rate in Canada for small businesses?

Canadian corporations pay 15% federal corporate tax on general income, or 9% on the first $500,000 of active business income if they qualify for the Small Business Deduction. Combined federal-provincial rates typically range from 11% to 14% for small businesses and 23% to 31% for general income, depending on the province.

What is the Small Business Deduction in Canada and who qualifies?

The Small Business Deduction (SBD) reduces the federal corporate tax rate from 15% to 9% on the first $500,000 of active business income earned by a Canadian-Controlled Private Corporation (CCPC). To qualify, the corporation must be a CCPC throughout the year, earn active business income, and not be associated with other corporations that share the $500,000 limit.

How does refundable tax work for CCPCs with investment income in Canada?

Canadian-Controlled Private Corporations (CCPCs) pay a high combined tax rate (around 50%) on investment income, but receive a refundable tax account (RDTOH) that is paid back to the corporation when dividends are distributed to shareholders. This mechanism prevents corporations from using the tax system to shelter passive income at the low small business tax rate.

When do I need to register for GST/HST in Canada?

You are required to register for GST/HST once your total taxable revenues exceed $30,000 in a single calendar quarter or over the last four consecutive quarters. If you are a small supplier earning under $30,000 you can still register voluntarily to claim input tax credits.

How do I file a GST/HST return in Canada?

GST/HST returns are filed annually (most small businesses), quarterly, or monthly based on revenue thresholds set by the CRA. The return reports HST collected minus input tax credits (ITCs) claimed on business expenses, with the net amount either remitted to or refunded from the CRA. Annual returns are due 3 months after the fiscal year-end.

Should I pay myself a salary or dividends from my Canadian corporation?

The right mix of salary and dividends depends on your personal income needs, CPP objectives, and province. A salary reduces corporate tax (it is deductible) and creates RRSP contribution room, but you pay CPP on it. Dividends are more tax-efficient when total income is moderate and you do not need RRSP room, but carry no CPP contribution and use after-tax corporate dollars.

How does the dividend tax credit work in Canada?

The Canadian dividend tax credit (DTC) is a credit against personal income tax that reflects corporate tax already paid on the earnings distributed as dividends. Eligible dividends (from general-rate income) are grossed up by 38% and carry a federal DTC of 15.02%. Non-eligible dividends (from SBD-rate income) are grossed up by 15% and carry a federal DTC of 9.03%. The result is effective personal tax rates on dividends that are lower than equivalent employment income.

When is the T2 corporate tax return due in Canada?

The T2 corporate income tax return is due 6 months after your corporation's fiscal year-end. Any balance of tax owing, however, must be paid within 2 months of the year-end (or 3 months for eligible CCPCs with taxable income below the SBD limit). Filing late results in penalties of 5% plus 1% per month, up to 12 months.

What business expenses can I deduct in Canada?

The CRA allows deductions for expenses that are reasonable, incurred to earn business income, and not personal or capital in nature. Common deductibles include salaries, rent, professional fees, software, advertising, and 50% of meals and entertainment. Home office costs and vehicle expenses require specific documentation.

How do CRA payroll deductions work in Canada?

Every Canadian employer must withhold Canada Pension Plan (CPP) contributions at 5.95%, Employment Insurance (EI) premiums at 1.66%, and federal and provincial income tax from each employee's pay. The employer must also pay a matching CPP contribution and a 1.4x EI contribution on top of the employee share, and remit all amounts to the CRA on schedule.