TAX TREATMENT OF A CALGARY CORPORATION

Business incorporation lawyer assisting Calgary entrepreneurs and start-ups incorporate the appropriate corporate entity to advance their commercial ventures.

Contact Neufeld Legal PC at 403-400-4092 or Chris@NeufeldLegal.com

Understanding the tax treatment of corporations is crucial to ascertaining the value proposition emanating from operating as a Calgary-based corporation, given that there are numerous tax benefits that have been made available to corporations and their shareholders.

Calgary-based corporations are subject to a two-tiered tax system: federal corporate income tax and Alberta provincial corporate income tax. The specific rates and rules depend heavily on the type of corporation, the nature of its income, and the amount of income earned.

A. Federal Corporate Income Tax

• The Canada Revenue Agency (CRA) administers federal corporate income tax. The basic federal corporate tax rate is 38% of taxable income. However, this rate is subject to several reductions:

  • Federal Tax Abatement (10%): This reduction is intended to leave room for provincial/territorial taxes, as provinces and territories have the constitutional right to levy their own corporate income taxes. So, the effective federal rate becomes 28% (38% - 10%).

  • General Tax Reduction (13%): This further reduces the federal rate for general corporations. Net Federal General Corporate Tax Rate: After these reductions, the general federal corporate tax rate is 15% (28% - 13%).

• However, for a significant number of Canadian businesses, an even lower federal rate applies:

  • Small Business Deduction (SBD): This is a key benefit for Canadian-Controlled Private Corporations (CCPCs). The SBD reduces the federal tax rate on the first $500,000 of active business income to 9%. This is a major incentive for small and medium-sized businesses to incorporate in Canada.

B. Alberta Provincial Corporate Income Tax

• The province of Alberta sets its own provincial corporate income tax rates, which also utilizes a dual-rate system, with (i) a Lower Rate that applies to active business income that qualifies for the federal Small Business Deduction and (ii) a Higher Rate that applies to active business income above the Small Business Deduction limit, and to other types of income (like passive investment income for most corporations).

• To determine the total corporate tax rate, you combine the applicable federal and Alberta provincial rates, for example:

  • for a CCPC claiming the SBD, one would utilize the Federal SBD rate of 9% PLUS the Alberta Provincial lower rate of 2%, for a total combined rate on the first $500,000 of active business income that can be as low as 11%.

  • for general income beyond the SBD or for non-CCPCs, one would utilize the Federal general rate of 15% PLUS the Alberta Provincial higher rate of 8%, for a total combined rate of approximately 23%.

C. Key Concepts and Specific Income Types

• Canadian-Controlled Private Corporation (CCPC): This is a crucial designation. A CCPC is a private corporation that is a Canadian corporation and is not controlled, directly or indirectly, by non-residents or public corporations. CCPCs enjoy several tax advantages, primarily the Small Business Deduction and certain refundable tax credits.

• Active Business Income: This is income earned from the regular operations of a business. It typically qualifies for the lower SBD rates.

• Passive Investment Income: This includes income from property like interest, dividends (from non-connected corporations), rent (unless it's an active business), and taxable capital gains.

  • Higher Tax Rates: Passive investment income earned by CCPCs is generally taxed at much higher corporate rates (often close to the top personal marginal tax rate). This is part of the "integration" principle, aiming to discourage using a corporation solely to defer tax on passive investments.

  • Refundable Taxes: A portion of the corporate tax paid on passive investment income is often "refundable" to the corporation when it pays out taxable dividends to its shareholders. This mechanism ensures that eventually, the total tax burden on that income (corporate + personal) is similar to if the income was earned directly by an individual.

  • Capital Gains: Only 50% of a capital gain is taxable (taxable capital gain). However, this taxable portion is then subject to corporate tax at the passive income rate. A portion of this tax is also refundable. The non-taxable half of the capital gain can be paid out to shareholders as a tax-free "capital dividend" if certain conditions are met, making capital gains a tax-efficient form of corporate income.

• Personal Services Business (PSB): If a corporation earns income from providing services where the individual providing the services would reasonably be regarded as an employee of the person or entity receiving the services, it can be classified as a Personal Services Business. PSBs are subject to very high corporate tax rates (e.g., 33% federally) and have limited deductions, essentially removing most tax advantages to prevent disguised employment relationships.

• Taxable Capital Limit: The federal small business deduction begins to be reduced if a CCPC's taxable capital (equity and debt) and that of its associated corporations exceeds $10 million, and it's completely eliminated at $15 million. This limits the SBD to genuinely smaller businesses.

• Passive Income Clawback: If a CCPC earns too much passive investment income (over $50,000 annually), its small business limit (the $500,000 threshold for the SBD) is gradually reduced, effectively increasing the tax rate on its active business income. The SBD is eliminated if passive income reaches $150,000.

So if you are looking to incorporate a new corporation or deal with the corporate legalities impacting your company, whether in Calgary or elsewhere in Alberta, we welcome you to contact our law firm at 403-400-4092 or via email at Chris@NeufeldLegal.com.