Corporate taxes in Canada are regulated at the federal level by the Canada Revenue Agency (CRA). As of January 1, 2019 the "net tax rate after the general tax reduction" is fifteen per cent. The net tax rate for Canadian-controlled private corporations that claim the small business deduction, is nine per cent.

Revenue from corporate income taxes

In 2019, the total revenue from income taxes totaled $223.6 billion, with corporate income tax accounting for $50.4 billion, personal income taxes accounting for $163.9 billion, and non-resident income taxes accounting for $9.4 billion. Seasonally adjusted corporation profits before taxes for all corporations totalled $224.3B in Q1 2019, $243B in Q2, $230.8B in Q3, $225B in Q4, and $212B in Q1 2020, according to Statistics Canada. "Canadian corporate profits finished 2019 at an all-time high" in 2019. "[O]perating profits for non-financial corporations hit an all-time high of $297.6 billion in 2019", according to National Bank Financial Inc. (NBF). The mining industry had their highest profits in eight years and the oil and gas industry had their highest profits in five years. In 2017, revenues from personal income tax amounted to $143.7B, corporate income tax, $42.2B, and non-resident income tax $7.1B.

Federal tax rates Currently, the "basic rate of Part I tax is 38% of taxable income and 28% after federal tax abatement". The general corporate tax rate on business income—the net tax rate after the general tax reduction, is 15%. For Canadian-Controlled Private Corporations (CCPCs)s eligible Small Business Deduction (SBD), the net tax rate 9% as of January 1, 2019. The provinces or territories have a dual rate—a lower rate and a higher rate which is dependent on the corporation's income eligibility for the federal SBD.

Dual tax rates In most cases, the provinces and territories have two rates of income tax—the lower rate and the higher rate. Businesses that are eligible for the federal small business deduction (SBD) are also eligible for the lower corporate tax rate at the provincial and territorial levels. The SBD is based on "small business limits". All businesses that are not eligible for the SBD are taxed at the higher rate, which applies to all other income.

Small business taxation

In 2017, the overall small business tax rate was reduced from 11% to 9%. Controversial changes to small business taxation, proposed in 2017, were introduced when Bill Morneau was Finance Minister under Prime Minister Justin Trudeau. Changes included restricting several tax planning strategies that were frequently used by small businesses, such as passive investment income and income-sprinkling for private corporations.

Small business deduction (SBD) Canadian-controlled private corporations (CCPCs) reduce the corporate tax rate on their active business income by using the Small Business Deduction (SBD). The current tax rate for Canadian-controlled private corporations that claim the "small business deduction" (SBD), is nine per cent. The SBD is based on "small business limits" which is currently $500,000. Previously, a "CCPC using the SBD [could] claim the small business tax rate on up to $500,000 of its active business income carried on in Canada", which represented a sizable tax reduction. For almost all provinces and territories, the small-business limit is $500,000. Effective January 1, 2018, Saskatchewan increased its small-business limit to $600,000. As of January 1, 2019, Manitoba's small-business limit was raised from $450,000 to $500,000.

Another factor that determines if a corporation is eligible for the SBD is the "amount of taxable capital a CCPC and its associated corporations employ in Canada". When the taxable capital exceeds $10 million, the federal "small business limit" is reduced. "If that amount reaches $15 million, the CCPC’s active business income is no longer eligible" for the lower SBD rate. In other words, "every $1 of passive investment income earned" above the $50, 000 threshold, "has the potential to expose $5 of active business income to additional taxation."

Passive income investment Passive income investment is income from "fixed income investments", "dividend-paying stocks", interest, capital gain, rent, royalties and other earnings that are not directly related to the corporation's active main business income. This passive income can be significant for large corporations.

New rules introduced in 2018, are based on the CCPCs "Adjusted Aggregate Investment Income" (AAII)—passive investment income—and "tie SBD eligibility to investment income earned by associated corporations." Under these new rules, taxes cannot be "avoided by using a holding company."

Refundable dividend tax on hand (RDTOH) New rules came in effect in January 2019, related to CCPCs earning investment income, specifically, in regards to their "Refundable Dividend Tax on Hand" (RDTOH) balance. Under these rules, corporations are no longer able to "recover their RDTOH balance through the payment of eligible dividends" because the individuals receiving the dividends would see their taxes increase from 6% to 14% based depending on the province.

5,500 hours minimum From January 1, 2017 onward in Québec, a 5,500 minimum number of hours paid criterion was established for the provincial small-business deduction, which meant that CCPCs' employees had to have paid work for at least 5,500 hours annually in order for the CCPC to be eligible for the SBD. This applies to some sectors, including primary sectors such as agriculture, forestry, fishing, hunting, some resource-based sectors, and manufacturing and processing sectors (M&P) sector. "Special conversion rules apply to take into consideration hours worked (but not necessarily paid in the form of wages) by actively engaged shareholders who hold, directly or indirectly, shares of the corporation that carry more than 50% of the voting rights."

Provincial and territorial corporate tax rates

CRA listed tax rates According to the current CRA web page, in Newfoundland and Labrador corporate tax rates span from 3 per cent at the lowest rate to 15 per cent at highest rate; in Nova Scotia from 3% to 16%, in New Brunswick from 2.5% to 14%, in Prince Edward Island from 3%to 16%, in Ontario from 3.2% to 11.5%, in Manitoban 12% in Saskatchewan, from 2% to 12%, in British Columbia from 2% to 12%, in Nunavut from 3% to 12%, in the Northwest Territories, from 4% to 11.5%, and in Yukon from 2% to 12%.

According to a June 1, 2020 report, there are two or three levels of corporate taxes in the provinces and territories—the first includes small businesses, with income generally up to $500,000, that are eligible for the "small-business deduction" (SBD); the second includes businesses engaged in manufacturing and processing (M&P) with income greater than $500,000 that are not eligible for federal SBD (%); and the third includes general income businesses, with non-M&P income, that are not eligible for SBD (%). Québec has three levels—the rate for the first level is c. 4% to 5%, for the second level it is 11.50%, and for the third level it is 11.50%.

British Columbia

In British Columbia the lower rate of corporate income tax is 2%. Effective January 1, 2018, the higher rate is 12%. Previously, it was 11%.

Manitoba

In Manitoba, the lower rate of Manitoba's provincial corporation income tax is 0% and the higher rate is 12%.

New Brunswick

In New Brunswick the lower rate of corporate income tax is 2.5%. Prior to April 1, 2018, it 3%. The higher rate is 14%. The "New Brunswick business limit is not be subject to the federal passive income business limit reduction that applies to tax years starting after 2018."

Newfoundland and Labrador The lower rate of Newfoundland and Labrador income tax is 3% and the higher rate is 15%. "These rates also apply to income earned in the Newfoundland and Labrador offshore area."

Northwest Territories

The lower rate of Northwest Territories income tax is 4% and higher rate is 11.5%.

Nova Scotia

Effective April 1, 2020, Nova Scotia's lower rates decreased from 3% to 2.5% and the higher rate from 16% to 14%. These "rates also apply to the income earned in the Nova Scotia offshore area."

Nunavut The "lower rate of Nunavut income tax is 3% effective July 1, 2019. It was previously 4%...The higher rate of Nunavut income tax is 12%."

Ontario The Ontario basic income tax rate is 11.5% and the lower rate is 3.2% effective January 1, 2020. It was lowered from 3.5% in 2018 and from 4.5% in 2017.

Prince Edward Island

The lower rate of Prince Edward Island income tax is 3% effective January 1, 2020, a decrease from 3.5% in 2018, and from 4.5% before 2018. The higher rate of income tax is 16%.

Saskatchewan

The lower rate of Saskatchewan income tax is 2% and the higher rate is 12% effective January 1, 2018. Previously, it was 11.5%. Saskatchewan is the only province to have raised its SBD levels from $500,000 to $600,000.

Yukon The lower rate of Yukon income tax is 2% and the higher rate of tax is 12%.

Alberta On June 29, 2020, Premier Jason Kenney announced that the corporate tax rate would be lowered to 8% from 10% on July 1, 2020.

Historically, during World War II, the provinces had temporarily ceded some of their provincial tax regulations to the federal government in "exchange for "tax rental" payments".

In the early 1960s, Alberta, and most of the provinces "entered into bilateral Tax Collection Agreement[s] (TCA) with the federal government in respect of their income taxes on individuals."

In response to the unpopular policies of then Prime Minister of Canada, Pierre Elliot Trudeau—specifically the National Energy Program—in 1981, Alberta withdrew from the centralized corporate tax administration—the TCA. This represented the "rejection of federal control over tax policy-making".

In the 2010s, the Alberta Chamber of Commerce "advocated a return to the harmonized corporate base, citing in particular a 2006 Ontario study estimating that Ontario businesses would save $90 million annually in tax, and an additional $100 million annually in compliance costs."

Québec Québec has three levels of corporate tax rates—the rate for the first level is c. 3% to 5%, for the second level it is 11.50%, and for the third level it is 11.50%.

Corporate tax avoidance Prior to the 1990s, corporations minimized interprovincial taxes by "locating income in provinces with lower rates."

General Anti-Avoidance Rule (GAAR)

Effective on September 13, 1988, the Government of Canada's General Anti-Avoidance Rule (GAAR) was introduced as a section of the Income Tax Act. In 2005, the federal GAAR, "was substantially amended to apply to a wider array of abusive transactions" and the amendments were retroactive to 1988.

In 1993, Gulf Canada won its case against the federal government regarding the reassessment of its FY 1974 and FY 1975 corporate income taxes, which resulted in a loss of about billion to the public.Gulf Canada v. The Queen, 90 D.T.C. 6622.The Queen v. Gulf Canada, 92 D.T.C. 6123.

Aggressive tax planning (ATP)

Aggressive tax planning (ATP) is a "global phenomenon that threatens the integrity of national tax systems and has a negative effect on public finances", according to a 2009 Québec Department of Finance working paper. The OECD's 2006 "Seoul Declaration", which had expanded the 2004 Corporate Governance Guidelines on "tax and good governance", called for OECD members to create a "directory of aggressive tax planning schemes so as to identify trends and measures to counter such schemes." The OECD said that with the liberalisation of trade and capital, along with "advances in communications technologies" has made "enforcement of national tax laws "more difficult". This had led to the rise of "structures which challenge tax rules, and schemes and arrangements by both domestic and foreign taxpayers to facilitate non-compliance with our national tax laws."