Ontario Corporate Tax Rates Explained
Tax rules are complex; however we have simplified and summarized the salient elements of the taxation of Ontario corporations in this short article.
A corporation’s tax rate is determined by the characterization of income that flows into the corporation, and not by the characterization of the corporation itself. To clarify, it is not whether a corporation is classified as a ‘holding corporation’ or an ‘operating corporation’ that determines its tax rate but rather, it is the characterization of the income flowing into the corporation that determines its tax treatment.
Corporations pay a flat rate of tax and not a marginal rate of tax. The flat rates are as follows: corporate income tax is 12.2% for CCPC’s (under $500k of net revenue); 26.5% for CCPCs on active income above $500k of net revenue or for non-CCPC’s and 50.2% for passive income (which is defined as rent, interest, dividends and royalties).
As per the rule pertaining to associated corporations, where corporations have common ownership, all related corporations will share in the Small Business Deduction (SBD for short). The SBD is what reduces a corporation’s tax rate from 26.5% to 12.2%. In other words, where a group of associated companies exceed $500k of net revenue, then it will lose access to the SBD for each dollar above the $500k, which means that each dollar above $500k will be taxed at 26.5%. Once the combined taxable capital exceeds $10m, the corporations will lose access to the SBD all together. This means that even the income under $500k will attract the higher 26.5% rate. It is important to note that the threshold for the SBD is $500k of net revenue and not gross revenue.
The above explains the taxation of corporations earning active business income. As regards corporations that earn passive income (rent, interest, dividends and royalties) this attracts a tax rate of 50.2% inside the corporation. However, due to the RDTOH rules (Refundable Dividend Tax On Hand), the corporation will earn a credit of 30 points where it makes a distribution (declares a dividend) to its personal shareholders. Once the dividend is declared, it reduces the corporate tax rate (to the extent of the dividend) to 20% which is relatively low.
For this reason, to the extent that a shareholder wishes to withdraw a dividend from its corporation, to the extent possible, it should do so from a passive corporation so as to reduce the internal passive income tax rate from 50% to 20%.
If you have questions regarding corporate tax rates, feel free to reach out to one of our lawyers for further assistance.
-Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.
© Kalfa Law, 2021
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.