CANADA Law and Practice Contributed by: Marc-André Godard, Pierre Allard, Isabelle Gagnon and Mehrez Houacine, BCF Business Law LLP
3.2 Individual and Corporate Rates One of the main advantages of providing services through a corporation is the ability to benefit from the small business deduction, which provides a prefer - ential tax rate of 9% at the federal level on the first CAD500,000 of ABI earned by a corporation that qualifies as a CCPC. ABI above CAD500,000 is taxed at a federal rate of 15%. However, this preferential tax rate does not apply to personal services businesses carried on by a corpo - ration. A personal services business is one that pro - vides services where the individual who performs the services on behalf of the corporation (ie, the incorpo - rated employee) would reasonably be regarded as an employee of the person or partnership to which the services were provided, but for the existence of the corporation. These rules are not restricted to profes - sionals. The taxable income of a personal services business is taxed at a flat rate equal to the top marginal personal tax rate, thus removing the advantage afforded by the lower corporate tax rates. 3.3 Restrictions on Retention of Earnings by Closely Held Corporations Passive income rules provide for a gradual reduction of the small business active income limit of CAD500,000 available to CCPCs, known as the business limit, on which the preferential tax rate of 9% applies where a corporation, together with its associated corporations, earned investment income of between CAD50,000 and CAD150,000 in a year. The reduction effective - ly decreases the annual business limit by CAD5 for each CAD1 of investment income earned in excess of CAD50,000. Pursuant to such rules, when the aggregate invest - ment income of a CCPC earning active income and its associated corporations is CAD150,000 or higher for a given year, the CCPC will not have access to the preferential tax rate of 9% applicable to ABI and will therefore be taxed at the regular rate of 15%.
Certain entities may be exempt from these rules, either because they do not meet the de minimis thresholds or because they operate almost entirely in Canada and meet the conditions prescribed under the ITA. Other sector-specific exclusions may apply in respect of borrowings made for certain projects. 2.6 Consolidated Tax Grouping Unlike other jurisdictions, Canada does not have a formal system providing for the consolidated taxation of corporate groups. A corporation’s losses may be used by other mem - bers of the corporate group through reorganisations or financing arrangements, but such transactions require thoughtful planning and may even require advance tax rulings. 2.7 Capital Gains Only 50% of the capital gain of a corporation is tax - able, and that amount is taxed as investment income. The tax rate will depend on whether the corporation qualifies as a CCPC (see 1.4 Tax Rates for additional information on tax rates paid by corporations). There is no exemption or relief from the taxation of capital gains for corporations. 2.8 Other Taxes on Transactions In addition to the federal income tax, corporations may be subject to goods and services tax, municipal taxes, land transfer taxes, federal and provincial social security contributions, and provincial payroll taxes. Corporations are also subject to provincial income tax. 2.9 Other Notable Taxes See 2.8 Other Taxes on Transactions . 3. Corporations and Non-Corporate Businesses 3.1 Form of Closely Held Local Businesses Most businesses are carried on by corporations.
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