Corporate Tax in Canada: Rates, Filing Rules and Key Tax Issues

How Does Corporate Tax Work in Canada?

Canadian corporations may be subject to federal and provincial or territorial income tax, along with filing, instalment, payroll, GST/HST, and other tax obligations depending on their activities.

The applicable tax rate depends on factors such as the corporation’s residence, province or territory, Canadian-controlled private corporation (CCPC) status, type of income, associated corporations, taxable capital, and investment income.

This guide provides an overview of Canadian corporate tax rates, the Small Business Deduction, T2 filing deadlines, capital gains, common tax issues, and what happens when a corporation has a dispute with the Canada Revenue Agency (CRA).

For strategic advice involving corporate reorganizations, business sales, succession, or other transactions, visit our Canadian tax planning lawyers page.

Quick Corporate Tax Overview

General federal corporate income tax rate: 15% after the federal abatement and general rate reduction.
Federal small business rate: 9% on eligible active business income of qualifying Canadian-controlled private corporations.
Provincial or territorial tax: additional rates apply depending on where the corporation earns its income.
T2 filing deadline: generally six months after the corporation’s tax year-end.
Balance-due date: generally two months after year-end, with a three-month deadline available to certain qualifying CCPCs.
Instalments: corporations meeting the applicable requirements generally make monthly or quarterly instalment payments.

What Is Corporate Income Tax in Canada?

A corporation is generally treated as a separate taxpayer from its shareholders.

Canadian corporations may therefore have their own tax obligations, including:

Corporation income tax;
Provincial or territorial corporate income tax;
GST/HST;
Payroll deductions and remittances;
Information reporting;
Tax instalments;
Withholding tax obligations;
Capital gains and investment-income taxation; and
Other tax obligations arising from particular transactions.

The CRA administers federal corporate income tax and corporate income tax for most provinces and territories. Quebec and Alberta administer their own provincial corporate income taxes.

For official information, see the CRA’s corporation income tax overview.

What Is the Federal Corporate Tax Rate in Canada?

The general net federal corporate income tax rate is currently 15% after the federal tax abatement and general rate reduction.

Canadian-controlled private corporations that qualify for the Small Business Deduction can generally benefit from a federal rate of 9% on eligible income within their available business limit.

Provincial or territorial corporate income tax applies in addition to the federal tax.

For current federal and provincial rates, see the CRA’s corporation tax rates.

What Are the Corporate Tax Rates in Ontario?

For corporations earning income in Ontario, the provincial general corporate income tax rate is currently 11.5%.

Ontario also provides a lower corporate income tax rate of 3.2% for qualifying income eligible for the Ontario Small Business Deduction.

When combined with the applicable federal rate, the corporation’s effective income-tax rate depends on whether the income qualifies for small-business treatment or is taxed at the general corporate rate.

Rates and eligibility rules can change, so corporations should confirm the applicable rates for the relevant taxation year before completing a transaction or tax return.

What Is a Canadian-Controlled Private Corporation?

A Canadian-controlled private corporation, commonly called a CCPC, is a private corporation that satisfies the control and residency requirements in Canadian tax legislation.

CCPC status can affect access to a number of tax rules and incentives, including:

The Small Business Deduction;
Certain refundable taxes on investment income;
Scientific Research and Experimental Development tax incentives;
Shareholder tax planning opportunities; and
Other corporate tax provisions.

Whether a corporation qualifies as a CCPC depends on its ownership and control structure and should not be assumed solely because the business was incorporated in Canada.

How Does the Small Business Deduction Work?

The federal Small Business Deduction can reduce the federal corporate tax rate on qualifying active business income earned by an eligible CCPC.

The maximum federal business limit is generally $500,000, although the corporation may not have access to the entire amount.

The available business limit can be affected by:

Associated corporations;
Taxable capital employed in Canada;
Adjusted aggregate investment income;
The length of the taxation year;
Specified partnership income;
Specified corporate income; and
Other statutory limitations.

Associated corporations generally share the available federal business limit rather than each receiving a separate $500,000 limit.

Can Passive Investment Income Reduce the Small Business Deduction?

Yes.

For federal purposes, the business limit of a CCPC may be reduced where the combined adjusted aggregate investment income of the corporation and its associated corporations exceeds the applicable threshold.

The federal reduction generally begins when combined adjusted aggregate investment income exceeds $50,000 and eliminates the federal business limit once the amount exceeds $150,000.

This means that holding substantial passive investments inside an operating corporate group can potentially affect access to the federal small-business rate.

Are Personal Services Businesses Taxed Differently?

Yes.

A corporation may be considered to carry on a personal services business where an incorporated individual provides services in circumstances that would otherwise resemble an employee-employer relationship, subject to statutory exceptions.

Personal services business income is subject to special tax rules and generally does not qualify for the Small Business Deduction.

The classification can also significantly restrict deductible expenses.

Whether a corporation is a personal services business depends on the underlying working relationship and should be assessed based on the particular facts.

How Are Capital Gains Taxed in a Corporation?

When a corporation disposes of capital property for more than its adjusted cost base and applicable disposition costs, it may realize a capital gain.

The currently enacted capital gains inclusion rate is one-half, meaning that generally 50% of a capital gain is included in taxable income, subject to the applicable rules.

The federal government previously proposed increasing the inclusion rate for corporations, but later announced that it would not proceed with that proposed increase.

Corporate capital gains can also interact with rules involving:

Aggregate investment income;
Refundable dividend tax on hand;
The capital dividend account;
Capital losses;
The Small Business Deduction; and
Corporate reorganizations and asset dispositions.

Because the tax consequences can vary significantly depending on whether a corporation sells assets or shareholders sell shares, tax planning should generally occur before a major transaction is completed.

When Is a Corporation’s T2 Tax Return Due?

A corporation must generally file its T2 Corporation Income Tax Return within six months after the end of its taxation year.

For example, a corporation with a December 31 year-end generally has a T2 filing deadline of June 30 of the following year.

The filing deadline should not be confused with the deadline for paying the corporation’s tax balance.

For official CRA guidance, see when to file a corporation income tax return.

When Is Corporate Income Tax Due?

Corporation income tax balances are generally due two months after the end of the taxation year.

Certain Canadian-controlled private corporations may instead have a balance-due date of three months after year-end where the statutory conditions are satisfied.

This means a corporation can be required to pay its tax before its T2 return is due.

For current rules, see the CRA’s corporate balance-due guidance.

Do Corporations Have to Pay Tax Instalments?

Many corporations are required to make income-tax instalment payments during the taxation year.

Depending on the corporation’s circumstances, instalments may be due monthly or quarterly.

Failure to make sufficient instalments on time may result in instalment interest and, in some circumstances, an instalment penalty.

Do Most Corporations Have to File Their T2 Electronically?

Most corporations are required to file their T2 returns electronically, subject to limited exceptions.

Corporations should use current CRA-approved filing methods and software applicable to the particular taxation year.

What Payroll Obligations Do Corporations Have?

A corporation with employees may be required to deduct and remit amounts including:

Income tax;
Canada Pension Plan contributions; and
Employment Insurance premiums.

Payroll obligations can involve strict remittance deadlines, and failure to remit amounts deducted from employees can result in significant penalties, interest, and collection consequences.

What Happens If a Corporation Files Its T2 Late?

A corporation that files a return late when tax is owing may be subject to a late-filing penalty and interest on the unpaid balance.

Additional or enhanced penalties can apply in certain circumstances, including repeated failures to file following a formal CRA demand.

If penalties or interest arose because of extraordinary circumstances, CRA delay, financial hardship, or other qualifying circumstances, taxpayer relief may be worth considering.

See our CRA Form RC4288 taxpayer relief guide.

What Happens If a Corporation Cannot Pay Its CRA Tax Debt?

Filing and paying are separate obligations. A corporation should generally file its required returns even where it cannot immediately pay the entire tax balance.

If the corporation cannot pay in full, it may be possible to discuss a payment arrangement with the CRA.

However, corporate tax debts can also lead to collection action, including Requirements to Pay, bank account enforcement, property registrations, and other remedies.

See our guide to owing the CRA money and being unable to pay.

If enforcement has already begun, see our CRA collections and enforcement guide.

What If the CRA Audits a Corporation?

A CRA corporate tax audit may examine issues such as:

Revenue recognition;
Business expenses;
Shareholder benefits;
Management fees;
Related-party transactions;
Capital versus current expenditures;
GST/HST;
Payroll;
Personal services business status;
Corporate reorganizations; or
Other tax positions reported by the corporation.

If your corporation receives an audit letter, see our CRA Audit Letter: What to Do Next guide.

For legal representation during the audit itself, visit our CRA audit lawyers page.

What If a Corporation Disagrees With a CRA Reassessment?

If the CRA issues a corporate reassessment that the corporation believes is incorrect, the corporation may have the right to file a Notice of Objection.

Corporations generally have 90 days from the date of the notice to object.

Large corporations are also subject to special objection requirements that can restrict which issues and amounts may later be pursued.

See our Notice of Objection (T400A) guide.

For legal representation, visit our CRA tax objection lawyers page.

Can a Corporate Tax Dispute Go to Tax Court?

Yes.

If a corporation’s objection does not resolve the dispute, the corporation may have the right to appeal to the Tax Court of Canada.

Strict appeal deadlines apply.

Learn more about our Tax Court appeal services.

When Should a Corporation Consider Tax Planning?

Corporate tax planning is particularly important before transactions that may create significant tax consequences.

Examples include:

Incorporating or restructuring a business;
Corporate reorganizations;
Section 85 rollovers;
Estate freezes;
Introducing new shareholders;
Selling a business;
Purchasing or selling business assets;
Succession planning;
Moving assets between corporations;
Paying dividends or other shareholder amounts; and
Transactions involving related corporations.

Planning before a transaction is completed generally provides more options than attempting to correct unintended tax consequences afterward.

Learn more about our corporate tax planning services.

Common Corporate Tax Issues

Missing T2 filing or payment deadlines;
Incorrectly claiming the Small Business Deduction;
Failing to account for associated corporations;
Passive investment income reducing the federal business limit;
Personal services business classification;
Shareholder loans or benefits;
Incorrect treatment of capital versus income transactions;
Payroll or GST/HST remittance problems;
Unreported corporate income;
CRA audit adjustments; and
Undocumented or poorly structured corporate transactions.

How Our Tax Lawyers Assist Corporations

Advise on corporate tax planning and reorganizations;
Review tax consequences of business purchases and sales;
Advise on section 85 rollovers and other restructuring transactions;
Represent corporations during CRA audits;
Prepare and pursue Notices of Objection;
Represent corporations in Tax Court proceedings;
Address CRA collection matters and payment issues;
Prepare taxpayer relief requests where appropriate; and
Advise on other complex Canadian corporate tax matters.

Frequently Asked Questions About Corporate Tax in Canada

What is the federal corporate tax rate in Canada?

The current general net federal corporate tax rate is 15%. Qualifying CCPCs may benefit from a 9% federal rate on income eligible for the Small Business Deduction.

What is the small business corporate tax rate in Ontario?

The Ontario lower corporate income tax rate is currently 3.2% on qualifying income, in addition to the applicable federal corporate income tax.

How much income qualifies for the Small Business Deduction?

The maximum federal business limit is generally $500,000. The available limit may be shared among associated corporations or reduced under other rules, including the taxable-capital and passive-investment-income provisions.

When is a corporate T2 tax return due?

A T2 return is generally due within six months after the corporation’s taxation year-end.

When does a corporation have to pay its tax balance?

The balance is generally due two months after year-end. Certain qualifying CCPCs may have three months to pay where the applicable conditions are satisfied.

What is the capital gains inclusion rate for corporations?

The currently enacted capital gains inclusion rate is one-half. The previously proposed increase in the inclusion rate was not pursued by the federal government.

Does a corporation need to file separately in every province?

Not necessarily. The CRA administers provincial and territorial corporate income tax for most jurisdictions through the federal corporate return. Quebec and Alberta administer their own corporate income taxes separately.

Can a corporation challenge a CRA reassessment?

Yes. A corporation generally has 90 days from the date of the notice to file an objection, subject to the applicable statutory rules and any special requirements for large corporations.

Speak With a Canadian Corporate Tax Lawyer

Canadian corporate tax issues can involve more than simply calculating an annual tax rate. Corporate structure, transactions, shareholder relationships, audits, reassessments, collections, and business sales can all create significant tax consequences.

KR Law Firm advises businesses and corporations on Canadian tax planning, CRA disputes, tax litigation, and related corporate tax matters.

Book a Free Consultation with one of our tax lawyers to discuss a corporate tax matter.