Corporate Taxation Explained

1. Corporate Income Tax

Corporate income tax is a tax levied on the net income of corporations. This tax is calculated by applying the applicable tax rate to the taxable income of the corporation. Taxable income is determined by adjusting the corporation's accounting income for items such as capital cost allowance (CCA), non-deductible expenses, and taxable capital gains.

Example: A corporation reports $500,000 in accounting income. After deducting $100,000 for CCA and adding back $50,000 for non-deductible expenses, the taxable income is $450,000. If the applicable tax rate is 25%, the corporate income tax would be $112,500.

2. Taxable Income

Taxable income is the amount of income on which a corporation is required to pay tax. It is calculated by starting with the corporation's accounting income and making various adjustments to align it with tax rules. These adjustments include adding back non-deductible expenses, deducting capital cost allowance (CCA), and including taxable capital gains.

Example: A corporation has $600,000 in accounting income. After adding back $20,000 for non-deductible expenses and deducting $150,000 for CCA, the taxable income is $470,000. This amount is then subject to the corporate income tax rate.

3. Tax Credits and Deductions

Tax credits and deductions are mechanisms that reduce the amount of tax a corporation owes. Tax credits directly reduce the tax payable, while deductions reduce taxable income before applying the tax rate. Common tax credits include the small business deduction, investment tax credit, and scientific research and experimental development (SR&ED) tax credit.

Example: A corporation with $400,000 in taxable income qualifies for a $50,000 small business deduction. This reduces the taxable income to $350,000. If the tax rate is 25%, the initial tax payable would be $100,000. However, if the corporation also has a $10,000 SR&ED tax credit, the final tax payable would be $90,000.