What is the Small Business Tax Rate in Canada?
Corporation tax is one of the biggest financial factors that determines whether businesses grow, remain stable or ultimately start to lose money. Most business owners in Canada cite the reduction of the corporation tax rate as being the largest win for their businesses.
In 1971 there was a change in Canada’s Federal Corporation Tax rate with the intention of helping small businesses to thrive and recent changes in corporation tax law have seen further reductions year-on-year, which is excellent news for any small business.
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What is the Small Business Tax Rate in Canada?
In 2017 the federal government implemented the lower rate of tax – the small business tax rate, also known as the Small Business Deduction (SBD), to 10.5% and again lowered it in the two following years, so it now sits at just 9%. This was following fights from many organizations to lower the percentage of tax paid by smaller businesses in an effort to help them get off the ground and put a stop to the amount spent on small business closures due to unsustainable tax bills.
This change means an annual saving of around $7,500 on average per year for each small business. Any businesses that no longer qualify as a small business, in that they make more than $500,000 of taxable income per year, will pay the higher rate.
What Qualifies as a Small Business?
To qualify for the small business tax rate, your business needs to fall within a few select parameters:
- Earning less than $50,000 in income from passive investments.
- Earning less than $500,000 of active business income throughout the year.
- Your taxable capital is less than $10 million.
If your business is growing and your taxable capital is between $10 and $15 million, then there’s still a chance that you could benefit from the small business tax rate for a portion of your income, while the remainder is taxed at the general business amount.
Provincial and Territorial Tax Rates
Provinces and territories in Canada are subject to two different rates of taxable income – the lower rate and the higher rate. This is in addition to the federal tax rate of 9% for small businesses or 15% for general corporation tax.
In certain provinces or territories, the rates for business taxes mirror the overall business limit of less the $500,000 of income being taxed at 9%, while larger businesses are taxed at the general business rate of 15%
However, for areas that aren’t covered by corporation tax collection agreements (CRAs), meaning that the state is not allowed to ask for more tax than the federal standard, the rates of tax may vary as of January 2021.
For example, Yukon and Manitoba pay no corporation tax extra to the federal government if the business is still on the lower rate, whereas Ontario pays 3.2% on the lower rate in addition to the 9%.
Owning a business in a province or territory such as Prince Edward Island could be detrimental once your business makes over $500,000 in taxable income. While this area only pays 2% corporation tax as a small business on top of the 9%, which is actually still less than a small business would have paid in tax 5 years ago, once you cross the threshold into becoming a larger business, you’ll pay 16% corporation tax ads well as the higher federal rate, making this one of the most expensive places in Canada to own a larger business.
In some provinces or territories, the rate of tax paid on top of the federal tax is dependent on the type of business you own. For example, a manufacturing business may pay a different rate of provincial tax to a retail business.
More information on corporation tax within territories can be found in Guide T4012 on the government website.
Why is the Small Business Tax Rate Important?
As a small business, it can be incredibly difficult to make a profit for the first couple of years. This is due to expenses paid for business set up, research into products, advertising and employee wages. Often, these things mean that small businesses will make a loss up to year 3 of their turnover, so every dime saved counts and will help the business to overcome this difficult time.
For small businesses, it’s harder to secure funds, especially during the start-up period, as there’s no guarantees for success, meaning investors may be put off. Despite the lack of funding, these businesses are still liable for property taxes and payroll taxes, even if there’s no profit to pay this from.
The Small Business Tax Rate is a massive help with these issues. It allows the government to take tax from businesses, meaning that there’s no dispute over exemptions, but the lower rate gives the business a chance to make a profit (up to $500,000 in income), before it charges a standard rate, meaning there’s a little more money to play with.
Over the next few years, there will also be payroll increases and increased labor and carbon pricing, meaning that the extra money that the business gets to keep will be a massive help in the business staying afloat.
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What If I Don’t Qualify for the Small Business Tax Rate?
If you don’t qualify as a small business, then you will be taxed at the general business rate, which is currently 15% in Canada.
This may happen if your active business income exceeds $500,000 for the year and your taxable capital is more than $15 million.
What Happens If I Own a Business Outside Canada?
If your business or corporation is registered within Canada, then you will be subject to Canadian Corporate Income Tax (CIT). However, if you carry out business operations in Canada but your corporation is registered elsewhere, for example, if you have a shop in Canada but your registered business address is in the UK, then you will need to pay corporation tax based on the income made within Canada and not necessarily on income made by the business as a whole.
This system can be beneficial for larger corporations that operate on a worldwide basis. It gives business owners the opportunity to place their sites in areas that are likely to pay a lower corporation tax rate.
For example, global corporations may choose to set up their business in a province or territory within Canada which pays a lower rate of general corporation tax, therefore lowering their overall outgoings and only paying on money earned in that area.
This leaves companies with the cost-benefit analysis consideration of whether a lower tax rate of 1 or 2% will mean that the company makes more profit with slightly less footfall into the business overall.
Withholding Taxes
If you own a global corporation, within Canadian law, you may end up paying different amounts of tax based on the areas where you hold your business properties. In some cases, this might not be beneficial and may cost more money.
However, if Canada has a treaty with the corporation’s country of residence, then there’s a possibility that you can lump your total income across the two countries and pay the rate of the resident countries tax – which may help if the resident country has a lower tax rate.
A full list of treaties held with non-resident countries can be found on the government website.
The Zero-emission Tax Reduction
To assist with issues regarding sustainability, the Canadian government has proposed a temporary reduction of corporation tax based on the usage of zero-emission technology within corporations. This is to encourage businesses to use zero-emission technology during growth, limiting the number of emissions given off from business vehicles and machinery.
The temporary reduction means that 50% of the corporation tax due will be removed, which is a huge incentive for businesses to change their procedures and ways of working.
This means that the general corporation tax will be reduced to 7.5% of all income earned over $500,000, while the small business tax rate will be reduced to just 4.5% until the year 2032. That means that right now is the best time to launch a sustainable business, as this is the lowest that corporation tax has ever been.
To qualify for these rates, you’ll need to ensure that a minimum of 10% of your gross revenue for all active business areas in Canada or registered in Canada but operating elsewhere within a tax treaty country, is created using zero-emission technology to manufacture and transport goods.
Managing My Tax Rates as an Expat
If you are an expat residing in Canada, but own businesses and assets in other countries, it’s important that you ensure you’re paying the correct tax amount for each asset or property. Not declaring your tax or any late payments could cause you to receive a financial penalty.
A professional tax service will help you to determine whether you’re able to withhold some tax based on a treaty held with another country and will ensure you make the most of the small business tax rate, should your company still be small enough to take advantage.
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