Canada
Scope of Income Tax
Canadian-resident
companies are subject to federal income tax
on their worldwide income; non-resident companies
are generally subject to federal income tax
on their Canadian-source income only.
The Canadian tax system does not allow for
consolidation of group earnings, regardless
of the residence status of the companies within
the group.
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Canada Income Tax Rates
Corporation
tax rates vary depending on the territories
and provinces in which the business operates.
The effective federal rate is 28% (i.e. 38%
less federal tax abatement of 10%).
Companies can claim a small business deduction.
For Canadian-controlled private corporations,
the net tax rate (from January 1, 2008) is
11%. For other corporations, the net tax rate
(from January 1, 2010) is 18%; this rate will
be 16.5% from January 1, 2011, and 15% from
January 1, 2012.
Provincial and territorial tax rates (excluding
Quebec and Alberta, which do not have tax
collection agreements with the Canada Revenue
Agency (CRA)) are charged at either a lower
rate (which applies to income eligible for
the small business deduction or income based
on limits set by the province or territory),
or a higher rate on all other taxable income.
From January 1, 2010, the lower rate ranges
from 1% (in Manitoba) to 5.5% (in Ontario);
the higher rate ranges from 10.5% (in British
Columbia) to 16% (in Nova Scotia and Prince
Edward Island).
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Canada Calculation of Taxable Base
Companies
must calculate both their federal and provincial/territorial
tax liabilities. Note that dividend, interest,
royalty and property income, and capital gains,
are subject to separate tax rates within each
province or territory.
Normal business expenses can be deducted in
calculating taxable profit.
Under thin capitalisation rules, interest
on debts owed by tax-resident corporations
to certain non-residents are not deductible.
Transfer pricing in Canada is based on the
OECD model, which recommends the arm’s
length principle. Advance pricing agreements
can be negotiated with the CRA.
Losses can generally be carried back up to
three years; there is no limit stated for
carry forward of losses. Capital losses from
previous years can be used to reduce capital
gains included in income. Foreign tax credits
can be carried back up three years, or carried
forward for up to 10 years. Investment tax
credits can be carried back up to three years,
and carried forward for up to 20 years.
Canada Filing Requirements and Payment of Tax
Apart
from Quebec and Alberta (which have their
own corporation tax collection agencies),
provincial and territorial corporation taxes
are collected by the CRA along with federal
taxes.
The corporation income tax return must be
submitted to the CRA within six months after
the end of the company’s tax year. Failure
to file the return on time will result in
a penalty of 5% of the unpaid tax that would
have been due on the filing deadline, plus
and additional 1% of the outstanding tax for
each month the return remains unfiled. If
still unfiled after 12 months, higher penalties
apply.
Other penalties apply in specific instances
in relation to certain companies and forms
required to be filed.
Corporation income tax is payable in monthly
or quarterly instalments, depending on the
type of business and subject to a CAD3,000
threshold. Late payments and underpayments
are subject to instalment interest, plus a
penalty calculated by subtracting from the
instalment interest the greater of CAD1,000
or 25% of the instalment interest calculated
if no instalment has been made for the year.
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Canada Withholding Taxes
Interest,
dividend, rental and royalty payments made
to non-residents are generally subject to
withholding taxes. Rates are generally 25%
(or 10% or 15% in the case of dividends),
although rates may be reduced or nullified
where a double tax treaty applies.
Canada Sales Taxes and VAT
Most
goods and services supplied in Canada are
subject to a goods and services tax (GST)
of 5%; in addition, each province charges
its own sales tax.
Nova Scotia, New Brunswick, and Newfoundland
and Labrador have, however, introduced a “harmonised
sales tax” (HST), which combines the
GST and the local sales tax. HST applies to
the same goods and services as the GST, and
is charged at a rate of 13%. Nova Scotia announced
in April, 2010 that it would increase HST
from 13% to 15% with effect from 1 July, 2010.
Ontario and British Columbia introduced the
HST on 1 July, 2010 at 13%.
A number of exemptions apply, for example
to residential accommodation, medical and
health services, educational services, and
financial services. Zero rating applies to
certain goods and services, including exports,
basic foodstuffs, prescription drugs, and
many transportation services.
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