38 What are the similarities and differences between how tax payable is determined for individuals and corporations? (Overview)
Sam Newton
What are the similarities and differences between how tax payable is determined for individuals and corporations?
Calculating Net Income For Tax Purposes (NITP) and, to some extent, Taxable Income is very similar for both individuals and corporations. The biggest differences show up in the way Taxable Income is actually taxed. We’ll look into these similarities and differences in more detail below.
Similarities
NITP – Corporations and individuals both follow the Section 3 ordering rules. The only real difference when calculating NITP is that some types of income and expenses really only relate to individuals (spousal support, employment income, child care expenses) and we wouldn’t expect them to be part of a corporate tax return.
Taxable Income – Division ‘C’ deductions, which get us from NITP to Taxable Income, are also very similar although there are a few key differences as follows:
| Item |
Personal tax treatment |
Corporate tax treatment |
|
Charitable donations |
Personal tax credit (ITA 118.1) |
Division ‘C’ deduction (ITA 110.1(1)) |
|
Capital Gains Deduction |
Division ‘C’ Deduction (ITA 110.6) | Not available to corporations |
|
Dividends from Canadian Corporations (other than capital dividends) |
Included in property income (NITP) and receive dividend tax credit |
Division ‘C’ deduction (ITA 112), then dividends are taxed under Part IV of the ITA |
Tax Rates and Process
The key difference between corporate and individual tax returns is how taxable income is actually taxed. For individuals, taxable income (regardless of the type of income) is grouped together and taxed using the progressive tax brackets. For corporations, the type and amount of items included in taxable income matters and is taxed as follows:
| Taxable Income Element |
Corporate Tax Process |
|
Active Business Income (ABI) <= the Small Business Deduction Threshold |
Taxed at a very low rate to encourage small businesses. |
|
Active Business Income (ABI) > the Small Business Deduction Threshold |
Taxed at a moderate rate |
|
Passive income (interest, some rental income etc.) |
Taxed at an extremely high rate to discourage having passive income in a corporation. The intention is for corporations to focus on active business and flow any extra cash/passive items out to shareholders. |
Note, the above elements apply primarily to Canadian Controlled Private Corporation (CCPC’s). Public corporations (and non-CCPC’s) are not eligible for some of these items (like the Small Business Deduction)
Here are the corporate tax rates based on the type and amount of income. These specific elements will be addressed in more detail later on in the book.
|
CCPC ABI<= SBD |
CCPC ABI > SBD |
CCPC Passive income |
Non CCPC |
ITA |
|
| Basic Rate | 38% | 38% | 38% |
38% |
123(1)(a) |
| Provincial Abatement | (10%) | (10%) | (10%) | (10%) | 124(1) |
| Small Business Deduction | (19%) | NA | NA |
NA |
125(1) & 125(1.1) |
| General Rate Reduction | NA | (13%) | NA |
(13%) |
123.4(2) |
| Additional Refundable Tax | NA | NA | 10.7% |
NA |
123.3 |
| Total federal tax rate | 9% | 15% | 38.7% |
15% |
|
As you can see, for CCPC’s, Active Business Income below the Small Business Deduction limit is taxed at a very low rate (9%), passive income is taxed at a very high rate (38.7%), and all other income is taxed at 15%. This stratification and different tax treatment of the various types of income is the main difference between the taxation of corporations and individuals.
Interactive content (Author: Karn Thiara, January 2020)
Reference: FITAC > Tax Rates and Tools > Corporate Income Tax Rates – Federal Components
January 2020
