An Introduction to Corporate Tax Law in Canada
John Jaffey for The Lawyers Weekly
The law relating to the taxation of corporations is as complex and cumbersome as Canadian law gets. Without the assistance of a Canadian corporate tax lawyer or chartered accountant, even a rocket scientist would be at a loss to understand sections 123 to 219 of the Income Tax Act, which it calls "the rules applicable to corporations."
To further complicate matters, each province in Canada has its own corporate tax laws, which are interrelated to the federal Act.
Not only are the laws for the taxation of corporations in Canada more complex than for personal tax, but there are other disadvantages as well. The owner(s) of a corporation in Canada must file both personal and corporate tax returns each year. In many cases this involves increased accounting fees. Unlike a sole proprietorship or partnership, corporate losses in Canada cannot be deducted from the owner's personal income. Nor are corporations eligible for personal Canadian tax credits. Every dollar earned is taxed.
However, the advantages of incorporating in Canada often outweigh the negative tax consequences. For example, Canada offers extremely attractive research and development tax credits, such as the Scientific Research and Experimental Development program.
Another example of tax relief applied to Canadian-controlled private corporations, which are entitled to claim a small-business deduction on all active business income earned in Canada. However, there is a limit on the amount of income that qualifies for this largesse.
Third, corporations in Canada are entitled to a lifetime capital gains exemption for small business shares.
And finally, corporations in Canada can work with the payment of funds to owners and shareholders-through the use of dividends instead of salary, deferring tax on bonuses, and the use of stock options and shareholder loans-to reduce Canadian personal income taxes. If you incorporate a small business, you can determine when you personally receive income; thus, instead of getting your income when it's received, being incorporated permits you to take your income at a time when you'll pay less in tax.