{"id":6618,"date":"2016-04-30T01:43:46","date_gmt":"2016-04-30T01:43:46","guid":{"rendered":"https:\/\/www.investmentimmigration.com\/?p=6618"},"modified":"2019-02-12T13:51:25","modified_gmt":"2019-02-12T18:51:25","slug":"canada-reduces-tax-for-small-businesses","status":"publish","type":"post","link":"https:\/\/www.investmentimmigration.com\/canada-reduces-tax-for-small-businesses\/","title":{"rendered":"Business Immigrants: How Canada Reduces Tax for Small Businesses"},"content":{"rendered":"

Immigrants to Canada have access to one of the world\u2019s most competitive tax regimes for starting a new business. An important advantage enjoyed by business owners is a low tax rate applicable to active business income earned in Canada. This is called the \u201csmall business deduction\u201d.<\/p>\n

\"Small

Small Business Deduction : Important Inventives for New Businesses in Canada<\/p><\/div>\n

Generally, business income earned in Canada is subject to a general federal tax rate of 15%. In addition, all provinces tax business income at rates ranging from 10 to 16%, depending on the province. As a result, the total combined rate may vary from 25 to 31%, depending on the province. The small business deduction reduces the tax rate applicable to the first $500,000 of business income from 15% to 10.5% at the federal level, and significant reductions also apply to rates charged by provinces.<\/p>\n

For example, the combined federal\/provincial general tax rate on corporate business income in Ontario is 26.5%, but the combined rate for income qualifying for the small business deduction is reduced to 15%. In Quebec, the rates are reduced from 26.9% to 18.5%. The reduced tax rates for small businesses by province are provided in the table below.<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Combined Federal\/Provincial Corporate Income Tax Rates<\/strong><\/td>\n<\/tr>\n
<\/td>\nGeneral Rate<\/td>\nSmall Business Rate<\/td>\nIncome Eligible for the Small Business Rate<\/td>\n<\/tr>\n
Alberta<\/td>\n27%<\/td>\n13.5%<\/td>\n$500,000<\/td>\n<\/tr>\n
British Columbia<\/td>\n26%<\/td>\n13%<\/td>\n$500,000<\/td>\n<\/tr>\n
Manitoba<\/td>\n27%<\/td>\n10.5%<\/td>\n$450,000<\/td>\n<\/tr>\n
New Brunswick<\/td>\n29%<\/td>\n14.5%<\/td>\n$500,000<\/td>\n<\/tr>\n
Newfoundland & Labrador<\/td>\n30%<\/td>\n13.5%<\/td>\n$500,000<\/td>\n<\/tr>\n
Nova Scotia<\/td>\n31%<\/td>\n13.5%<\/td>\n$350,000<\/td>\n<\/tr>\n
Northwest Territories<\/td>\n26.5%<\/td>\n14.5%<\/td>\n$500,000<\/td>\n<\/tr>\n
Nunavut<\/td>\n27%<\/td>\n14.5%<\/td>\n$500,000<\/td>\n<\/tr>\n
Ontario<\/td>\n26.5%<\/td>\n15%<\/td>\n$500,000<\/td>\n<\/tr>\n
Prince Edward Island<\/td>\n31%<\/td>\n15%<\/td>\n$500,000<\/td>\n<\/tr>\n
Quebec<\/td>\n26.9%<\/td>\n18.5%<\/td>\n$500,000<\/td>\n<\/tr>\n
Saskatchewan<\/td>\n27%<\/td>\n12.5%<\/td>\n$500,000<\/td>\n<\/tr>\n
Yukon<\/td>\n30%<\/td>\n13.5%<\/td>\n$500,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Thus, in most cases, the regular rates on the amount of eligible business income are reduced in half for small companies carried on business in Canada. In comparison, in the Unites States a small business will generally pay corporate tax at the rate of approximately 40% and in France at the rate of approximately 35%.<\/p>\n\n\n\n\n\n\n
Canadian Resident<\/td>\nU.S.
\nResident<\/td>\n		French Resident<\/td>\n<\/tr>\n
Canadian Business
\n(Ontario)<\/td>\n		U.S.
\nBusiness<\/td>\n		French
\nBusiness<\/td>\n<\/tr>\n
Business Income : $500,000<\/strong>
\nTax: $132,500<\/strong><\/td>\n		Business Income : $500,000<\/strong>
\n Tax: $200,000<\/strong><\/td>\n		Business Income: $500,000
\nTax: $175,000<\/strong><\/td>\n<\/tr>\n
After-tax profit: $367,500<\/span><\/td>\nAfter-tax profit: $300,000<\/td>\nAfter-tax profit: $325,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

The low small business tax rate can result in a significant deferral of personal taxes if the money is kept in the business instead of being paid to the owner as a salary, bonus or dividend. The government has provided this incentive to encourage small businesses to reinvest their earnings for business expansion, job creation and investment.<\/p>\n

The small business deduction only applies to \u201csmall businesses\u201d. The government has set the level at which a private corporate group is no longer considered \u201csmall\u201d by using the concept of \u201ctaxable capital\u201d. A corporation\u2019s taxable capital essentially consists of its debt and equity, less deductions for certain investment assets. The small business deduction threshold is reduced on a straight-line basis when an associated corporate group\u2019s taxable capital employed in Canada in the preceding year is between $10 million and $15 million, and is completely eliminated when taxable capital exceeds $15 million. For example, if the associate corporate group\u2019s taxable capital is $12.5 million, the reduced tax rates will only apply to the first $250,000 of business income.<\/p>\n

Corporations that are controlled by non-residents do not qualify for the reduced tax rates, even if they are small. Therefore, if a Canadian business has several owners, – for example, several family members some of whom may not live in Canada, – it is important to ensure that the control of the business is with Canadian residents in order for the small business deduction to be available.<\/p>\n

Investment income earned by a private corporation controlled by Canadian residents does not qualify for the small business deduction and is subject to tax at the rate of 49.67-53.67%, depending on the province.<\/p>\n

The small business deduction is especially important to new immigrants as a leading study gives conclusive evidence that immigrants are far more likely to own businesses than their Canadian counterparts, a key component for economic growth.\u00a0 Released in March 2016 and entitled\u00a0Immigration, Business Ownership and Employment in Canada<\/a>, the study concludes that \u2018rates of private business ownership and unincorporated self-employment are higher among immigrants than among the Canadian-born population\u2019. We know this officially for the first time because data based on immigrant business ownership has only recently become available with the introduction of the\u00a0Canadian Employer-Employee Dynamics Database<\/em>,<\/em> which you can access\u00a0here<\/a>.<\/p>\n

Intending business immigrants to Canada are advised to review these and other considerations to ensure the best strategic corporate practices.<\/p>\n

This article was prepared with the generous assistance of Cragmore (www.cragmore.com<\/a>), a Canadian law firm specializing in international tax.<\/p>\n

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