Corporate Tax Basics for Canadian Small Businesses

Corporate Taxes

Tax season is the biggest headache for most businesses as they are unaware how to proceed and what are the proper rates that should be used and sometimes, companies overstate or understate their taxes which could lead the CRA to audit your accounts. Before continuing with this article, sometimes having a conversation can go a longer way. If you feel a need to speak with someone regarding your business, books or taxes, book it here.

If your accounts have been falsified and you have been proven guilty, Canada’s Income Tax Act and Excise Tax Act set out various offences with penalties that include jail time as well as fines of up to 200% of taxes evaded. Tax evasion activities can also result in charges being laid under the Criminal Code of Canada, and there are several areas of overlap between the tax acts and the Criminal Code. CRA has a separate investigations division to which any suspected tax evasion files are referred, either as a result of a normal tax audit or through third party tax evasion tips. The special investigator can issue a formal written demand and has wide powers of inquiry including the power to demand books and records and information from the taxpayer. A person who refuses to comply with the requirement to provide information is subject to prosecution under section 238 of the Income Tax Act or 326(1) of the Excise Tax Act, which each provides for fines of up to $25,000 and imprisonment of up to 12 months. These provisions are also applicable to a taxpayer who does not file tax returns. Prosecution for failure to file tax returns can therefore result in a jail term. A tax fraud investigator can apply to a judge for a search warrant under section 231.3 of the ITA (or under s.487 of the Criminal Code). Search warrants are executed by the CRA investigator with assistance by police officers. They will normally search both home and business premises and the offices of the accountant, and they will seize paper books records as well as any computers and digital storage devices. When these records are seized, they will normally be held for weeks and sometimes months, causing major disruption to business operations. Our Canadian tax lawyers often negotiate with CRA officials, or apply to court, for a timely return of these records. Accountant records are not subject to privilege (unlike lawyer’s files) and all of the accountant’s files will be seized. Tax evasion and tax fraud are established by subsection 239(1) of the Canada tax act. Penalties are established for making false statements in income tax returns or false entries in books and records, as well as for evading taxes, or for conspiring to commit those offences. The penalties set out a fine of between 50% to 200% of the tax and a jail term of up to 2 years. There are similar provisions relating to GST/HST tax evasion and tax fraud set out in section 327 of the Excise Tax Act. Furthermore subsection 239(2) allows the CRA tax lawyer prosecutor to proceed by way of indictment instead of by summary prosecution in which case the fines are 100-200% of the taxes evaded plus imprisonment of up to 5 years. If you are served with a Canada Income Tax related search warrant, or if you have been charged with tax evasion or with tax fraud or think that a CRA audit or a tax investigation may lead to tax prosecution or tax charges, you should immediately contact one of our experienced Canadian tax litigation lawyers for assistance.

No one wants to take the risk and make such mistake which could cost you so much and even imprisonment? Lets talk a bit about the tax laws in Canada which could be of help to your business.

First of all, let’s talk about the rates as these rates would determine how much taxes you owe to the CRA. The federal and provincial/territorial tax rates shown in the tables apply to income earned by a Canadian-controlled private corporation (CCPC). In general, a corporation is a CCPC if the corporation is a private corporation and a Canadian corporation, provided it is not controlled by one or more non-resident persons, by a public corporation, by a corporation with a class of shares listed on a designated stock exchange, or by any combination of these, and provided it does not have a class of shares listed on a designated stock exchange.

The small business income threshold is $600,000 in Saskatchewan. Therefore, Saskatchewan’s combined income tax rate on active business income between $500,000 and $600,000 is 15% (i.e., 15% federally and 0% provincially) until June 30, 2022, 16% (i.e., 15% federally and 1% provincially) effective July 1, 2022, to June 30, 2023 and 17% (i.e., 15% federally and 2% provincially) effective July 1, 2023. See the table “Small Business Income Thresholds for 2022 and Beyond” for the federal and provincial/territorial small business income thresholds. The general corporate tax rate applies to active business income earned in excess of the small business income threshold. See the table “Small Business Income Thresholds for 2022 and Beyond” for the federal and provincial/territorial small business income thresholds. CCPCs that earn income from manufacturing and processing (M&P) activities are subject to the same rates as those that apply to general corporations (see the tables “Federal and Provincial/Territorial Tax Rates for Income Earned by a General Corporation”). The federal government temporarily reduced the small business tax rate to 4.5% (from 9%) and the general corporate tax rate to 7.5% (from 15%) on eligible zero-emission technology manufacturing and processing income. The reduced tax rates apply to taxation years beginning after 2021. The reduced rates are gradually phased out starting in taxation years that begin in 2029 and are fully phased out for taxation years that begin after 2031.

Corporations that are CCPCs throughout the year may claim the small business deduction (SBD). In general, the SBD is calculated based on the least of three amounts — active business income earned in Canada, taxable income and the small business income threshold. The 2022 federal budget proposed a new range of $10 million to $50 million (previously $10 million to $15 million) over which the federal small business income threshold is reduced based on the combined taxable capital employed in Canada of a CCPC and its associated corporations. The measure would apply to taxation years that begin on or after April 7, 2022. A general tax rate reduction is available on qualifying income. Income that is eligible for other reductions or credits, such as small business income, M&P income and investment income subject to the refundable provisions, is not eligible for this rate reduction. Income of a corporation earned from a personal services business is not eligible for the general rate reduction and is subject to an additional 5% tax, which increases the federal tax rate on personal services business income to 33%.

For Accounting Standards for Private Enterprise (ASPE) and International Financial Reporting Standards (IFRS) purposes, a corporation’s recorded income tax liabilities and assets in their financial statements should be measured using tax rates that are considered to be “substantively enacted” at the balance sheet date. In general, where there is a majority government, federal and provincial tax changes are considered to be “substantively enacted” for ASPE and IFRS purposes when a tax bill containing the detailed legislation is tabled for first reading in the House of Commons or the provincial legislature. In the case of a minority government, however, the “substantively enacted” test is more stringent and requires the enabling legislation to have passed third reading in the House of Commons or the provincial legislature.

For U.S. Generally Accepted Accounting Principles (U.S. GAAP) purposes, a corporation’s recorded income tax liabilities and assets in their financial statements should be measured using tax rates that are considered to be enacted at the balance sheet date. In general, tax rate changes are considered enacted once the relevant bill has received Royal Assent. When tax rate changes are considered enacted or “substantively enacted”, the effect of the change in tax rate is reflected in the period in which the changes are enacted or “substantively enacted”. The effect of the change is recorded in income as a component of deferred tax expense in the period that includes the date of enactment or substantive enactment. For example, if a bill becomes “substantively enacted” for ASPE or IFRS purposes (enacted for U.S. GAAP purposes) on December 31, the tax rate changes should be reflected in the corporation’s financial statements for the quarter that includes December 31.

Corporations that are CCPCs throughout the year may claim the small business deduction (SBD). In general, the SBD is calculated based on the least of three amounts — active business income earned in Canada, taxable income and the small business income threshold. The 2022 federal budget proposed a new range of $10 million to $50 million (previously $10 million to $15 million) over which the federal small business income threshold is reduced based on the combined taxable capital employed in Canada of a CCPC and its associated corporations. The measure would apply to taxation years that begin on or after April 7, 2022. These changes are not substantively enacted or enacted as at June 30, 2022.

A general tax rate reduction is available on qualifying income. Income that is eligible for other reductions or credits, such as small business income, M&P income and investment income subject to the refundable provisions, is not eligible for this rate reduction. Income of a corporation earned from a personal services business is not eligible for the general rate reduction and is subject to an additional 5% tax, which increases the federal tax rate on personal services business income to 33%. Corporations that derive at least 10% of their gross revenue for the year from manufacturing or processing goods in Canada for sale or lease can claim the manufacturing and processing (M&P) deduction against their M&P income.

Will you be able to retain such rates and know when to apply them? 

Or you have other priorities such as managing the business and its operations. Another problem now is you have businesses in different regions of Canada, and this would mean that you’ll be having different rates and this can potentially be a headache for you.

At BHTAX CPA, we are here for you to attend all your about tax and accounting issues. Contact us now and lets discuss about all your business needs. Our range of services is meant to help you start, grow and retain most of the cash in your business. BHTAX CPA  is an accounting firm specializing in Small Business Bookkeeping & Tax Planning.

Located in Beautiful Forest City of London and Serving all of Ontario virtually. 

TALK TO US TODAY