Corporate Tax

Corporate Tax Rates Canada 2022

Paul Sharpe, CPA, CA
/
August 2, 2022

Affiliate disclosure

This article lists the federal and provincial corporate tax rates in Canada in 2022 for Canadian Controlled Private Corporations. It also explains how corporate taxes work for CCPCs.

Corporate Tax Rates Canada 2022

This article lists the federal and provincial corporate tax rates in Canada in 2022 for Canadian Controlled Private Corporations.  

The majority of incorporated small businesses in Canada are classified as “Canadian Controlled Private Corporations” or CCPCs. They’re also the businesses that we work with the most so we will be discussing CCPC tax rates in this article. 

We’ll first explain what CCPCs are and the types of income they typically earn.

To skip right to the corporate tax rate tables click here

What is a Canadian Controlled Private Corporation (CCPC)

We’re focusing on Canadian Controlled Private Corporations (CCPC) in this article.  Most but not all incorporated small businesses in Canada will fall under the classification of a Canadian Controlled Private Corporation.  

To be considered a CCPC, all of the following criteria must be met:

  • It is a private corporation that is controlled by Canadian resident(s).
  • It is a corporation that is resident in Canada.
  • It is a corporation that was either incorporated in Canada or resident in Canada from June 18, 1971.

A corporation cannot be a CCPC if:

  • It is under the direct or indirect control of a non-resident or non-residents of Canada.
  • It is controlled directly or indirectly by a public corporation, except for venture capital corporations described in Income Tax Regulation 6700.
  • It is under the control of a Canadian resident corporation with shares listed on a stock exchange outside of Canada.
  • It is under the direct or indirect control of any combination of persons meeting the first three conditions listed directly above.
  • Any class or classes of its shares appear on designated stock exchanges.

If you are a Canadian resident and you run a small business through a corporation, there is a good chance that it is a CCPC.

Corporate Tax Advantages for CCPCs

CCPCs have a few tax advantages when compared to other types of Canadian corporations.

Small Business Deduction (SBD)

The small business deduction is a reduced tax rate that applies to CCPCs that earn active business income.  

A simplified description of active business income is that it is income earned from the operation of a business.  Check this link for a detailed explanation

So, if your Canadian Controlled Private Corporation earns active business income then it will be eligible to receive the small business deduction.  

The small business deduction is applied on the first $500,000 of active business income earned in a given year.  

There is a Federal component to the SBD and a Provincial component. 

For example, earnings qualified for the SBD are taxed at a federal tax rate of 9% compared to the general rate of 15%.

The provincial tax rate reduction changes based on the province in question. For example, earnings qualified for the SBD in BC have a provincial tax rate of 2% compared to 12% if no SBD.

Lifetime Capital Gains Exemption for CCPCs

The lifetime capital gains exemption provides owners of qualified Canadian Controlled Private Corporations with tax-free capital gains of up to $913,630 (as of 2022).

This means that business owners can sell their company at a gain of $913k and pay no tax!

To be able to claim the Lifetime Capital Gains Exemption there are specific criteria that corporations must meet. 

Here is a simplified version of these criteria:

  • Asset test - 90% or more of the company’s assets must be used in active business (aka not holding passive investments) at the time of the sale.
  • Basic asset test - 50% of the company’s assets must be used in active business (aka not holding passive investments) for the entire 24 month period before the sale.
  • Holding period test - The owner of the business must have held the shares for at least 24 months before the date of the sale.

Income Types for CCPCs

In CRA’s eyes, there are many different types of income that CCPCs can earn. 

The most common that we see are Active Business Income and Investment Income so we’ll be focusing on those in this article.

Active Business Income 

Active business income is described in CRA’s corporate tax guide as:

Income earned from a business source, including any income incidental to the business.

This very generally means that it’s income earned from operations of your business. .

The guide goes on to explain that Active Business Income is not:

  1. Income from a specified investment business 
  2. Income earned from a personal services business 
  3. Income described in subparagraph (a)(i) of the definition of specified corporate income 

As with many tax issues, there are exceptions to these rules. The links above do go into detail of those exceptions, but it’s a bit too much word-salad to tackle in this article.

Example of Active Business Income

Avalon Accounting Inc. is a CCPC.  Avalon earns business income by providing accounting services.

If Avalon earned $250,000 in taxable income from those accounting services, the entire $250,000 would be considered active business income.

Investment Income

Corporations can also earn Investment income which is taxed at higher rates than Active Business Income.

Investment income is generally derived from property, including interest, dividends, rents, or royalties.

Example of Investment Income

Now let’s assume Avalon also decided to earn interest income by purchasing GICs.  

If Avalon earned $50,000 in interest income, that portion of Avalon’s taxable income would not be classified as active business income.

Common Corporate Tax Rates for CCPCs 

The three main tax rates that we’re going to look at are:

  • The general business rate
  • The small business deduction
  • Investment income tax rate

The General Business Rate

This is the higher business rate that applies to business income earned in excess of the small business limit.  

This is usually the tax rate applied to the taxable income of a CCPC exceeding $500,000.

There are both federal and provincial general business rates.

For example

  • The federal general business rate is 15%
  • The provincial general business rate for Ontario is 11.5%
  • The combined general business rate for an Ontario corporation is 26.5%

The Small Business Rate

The small business deduction reduces the corporate tax rate for active business income.

The majority of incorporated small businesses in Canada will qualify for the small business deduction.

We will denote this reduced tax rate as the “Small Business rate” in our tax rate tables.

Just like with the general rate, there are both federal and provincial small business rates.

For example

  • The federal small business rate is 9%
  • The provincial small business rate for Ontario is 3.2% 
  • The combined small business rate for an Ontario corporation is 12.2%

Investment Income Rate

Investment income earned in a corporation is taxed at a higher rate than even the general business rate.

Some examples of investment income that we often see in a corporation include:

  • Interest income
  • Dividend income
  • Royalty Income
  • Income from rents
  • Taxable capital gains

There can be a lot of complexity to how investment income is taxed. These are just general examples to provide an idea of what investment income is.

There are both federal and provincial tax rates that apply to investment income.

For example

  • The federal tax rate on investment income is 38.7%
  • The provincial tax rate on investment income for Ontario is 11.5% 
  • The combined tax rate on investment income for an Ontario corporation is 50.2%

These higher tax rates on investment income often catch people off guard. 

There are ways to reduce corporate tax on investment income. The most common being to pay out dividends to shareholders of the corporation. This creates a dividend refund in the corporation, refunding the “refundable dividend tax on hand.”

We aren’t getting into refundable taxes in this article, but it’s important to know that the dividend refund mechanism exists.

Canadian Federal and Provincial Corporate Tax Rates 2022

Let’s dive into the tax rates now that we have a general idea of what a CCPC is and the difference between active business income and investment income.

Each province has its own corporate tax rate structure. This includes different tax rates and income limits for the provincial part of the small business deduction.

The Federal corporate tax rate structure applies to CCPCs as well.  This leaves us with a combined corporate tax rate (Federal rate plus Provincial rate).  

You can use this combined rate to get a reasonable estimate of the taxes that your corporation will owe in a given year.

Federal and Provincial Small Business Corporate Tax Rates

Corporate Tax Rates Canada - Small Business Rates by Province

The small business income limit for Saskatchewan is $600,000 whereas the federal and all other provincial small business income limits are $500,000.

Federal and Provincial Corporate General Business Tax Rates

Corporate Tax Rates Canada - General Rates by Province

Federal and Provincial Corporate Tax Rates on Investment Income

Corporate Tax Rates Canada on Investment Income by Province

Corporate Tax Resources

We’ve got some great information on our blog about corporate taxes. 

If you’re looking for corporate tax rate information directly from the source, check out these federal and provincial pages.

Article by
Paul Sharpe, CPA, CA
.
Originally published
August 2, 2022
.
If you enjoyed this article, please consider sharing!

Use the form below or email hello@avalonaccounting.ca. We’ll respond within two business days with some questions and resources for you.

Want to hear more business tips?

Sign up to our newsletter to get tax and business tips from Joe as well as his expert insight into running a successful business.