Canada is the largest country in the western hemisphere. In fact, it is one of the largest countries across the globe. It is located in the northern part of North America, and extends from the Atlantic Ocean in the east to the Pacific Ocean in the west. Canada has managed to solidify its repute in terms of a stable government, a skilled workforce, as well as the overall standard of living that has seen an upward trajectory over the course of time. Additionally, Canada boasts a well-developed infrastructure that includes a transportation related network, as well as the overall state related industry. The official language in Canada is English and French. Ottawa is the capital of Canada.
From a business perspective, Canada tends to be one of the top notch choices for a lot of traders and manufacturers across the world. Factually, Canada has a thriving free-market economy. Normally businesses range from small owner-managed enterprises to multinational corporations. The economic development in Canada can be mainly attributed to export of agricultural staples, in addition to production and subsequent export of natural resource products, including minerals, oil and gas, as well other energy resources.
Taxes on Corporate Income
Corporations that is resident are subject to Canadian Corporate Income Tax on their worldwide income. On the other hand, non-resident corporations are also subject to Corporate Income Tax on income that is predominantly derived from carrying on a business in Canada, as well as on capital gains that arise on the disposition of taxable Canadian property.
The taxation year in Canada extends over a 12 month period from January to December. The rates for residents for the period ending on 31 December 2020 are given the following table:
Less: Provisional Abatement
Less: General Rate Reduction or Manufacturing and Processing Deduction
Net Federal Tax Rate
Provisional Abatement: The basic rate of federal tax is reduced by a 10% abatement to give the provinces and territories room to impose to Corporate Income Tax. It is made available in the form of taxable income that is allocated to Canadian provinces and territories.
General Rate Reduction: The general rate reduction are not applicable to the first 500,000 CAD of the active business income that is earned in Canada by Canadian Controlled private corporations.
Territorial Income Tax
All the existing provinces and territories impose Income Taxes on Income Allowable to a permanent establishment in the respective territory. Income is mainly allocated to a province or a territory using a two factor formula that is based on gross revenue, and on salaries and wages. The rates that are mentioned mainly apply across a 12 month taxation year that ends on 31st December. The rates for all the territories are different, and they are subject to change across all taxation orders.
As far as Tax Credits are concerned, there are a couple of tax credits too that are available to different corporations, based on a multitude of factors, like their location, as well as their field of work. A few of the corporate tax incentives are given below:
- Foreign Tax Credits: Tax payers that have a foreign-source income and are resident in Canada are eligible to avail the foreign tax credit relief.
- Regional Incentives: In specified regions of Canada (i.e. Atlantic Provinces, the Gaspe Region, as well as Atlantic offshore region), there is a chance to avail a 10% federal ITC for various forms of capital investment. The ITC is claimed against a taxpayer’s federal tax liability that arises in a particular year.
- Industry Incentives: Canada is known to offer numerous tax incentives for corporations at the federal, as well as provincial level for activities that are related to research and development, film, media, and interactive digital media, manufacturing and processing, as well as environmental sustainability.
Taxes on Individual Income
Individuals that are residing in Canada are subject to Canadian Income Tax on their worldwide income. In the same manner, relief from the double taxation is provided through Canada’s International Tax treaties, in addition to foreign tax credits and deductions that have already been paid on income that has been derived from sources outside Canada.
On the other hand, as far as non-residents are concerned, they are subject to Canadian Income Tax on Income from employment in Canada, in addition to income that is obtained from executing business within Canada, as well as Capital Gains from the disposition of taxable Canadian property.
For individuals that reside in Canada for a selective part of the year, they are taxed on their worldwide income only for the duration for which they were residing in Canada.
Federal Personal Tax
The personal tax rates for Canadian residents are as follows:
- For an annual income between 0 CAD and 48,535 CAD: An excess tax rate of 15% would apply.
- For an annual income between 48,546 CAD and 97, 069 CAD: An excess tax rate of 20.5% would apply.
- For an annual income between 97,070 CAD and 150, 473 CAD: An excess tax rate of 26% would apply.
- For an annual income between 150, 474 CAD and 214, 368 CAD: An excess tax rate of 29% would apply.
- For an annual income over and above 214, 368 CAD: An excess tax rate of 33% would apply.
Provincial/Territory Related Tax
In addition to Federal Income Tax, any individual who is residing in Canada in a specific province is subject to provincial or territory related tax. All the provinces and territories have different rates. They compute income tax based on based on tax-on-income systems. All the provinces (except for Quebec) use the definition provided by the federal government in calculating taxable income for the individual. As far as Quebec is concerned, it has its own personal tax system which calculates taxable income in a different manner. Because of the fact that Quebec collects their own tax, the federal income tax is reduced by percentage of 16.5% of federal tax for Quebec residents.
Alternate Minimum Tax
Apart from the normal tax computation, individuals also need to compute an adjusted taxable income and include certain tax preference items that are deductible from the calculation of regular taxable income. In the case where the adjusted taxable income exceeds the minimum tax exemption of 40,000 CAD, a combined federal and provincial rate of 25% is applied to the excess alternate minimum tax.
A minor child that has a passive income stream under an income splitting arrangement is subject to tax at the highest combined federal and provincial marginal rate (this can go up to as high as 54%). This is referred to as Kiddie Tax. Personal tax credits, or foreign tax credits cannot be claimed to reduce the kiddie tax. s