Corporate – Taxes on Corporate Income

As a general rule, corporations resident in Canada are subject to Canadian corporate income tax (CIT) on worldwide income. Non-resident corporations are subject to CIT on income derived from carrying on a business in Canada and on capital gains arising upon the disposition of taxable Canadian property (see Capital gains in the Income determination section for more information). The purchaser of the taxable Canadian property is generally required to withhold tax from the amount paid unless the non-resident vendor has obtained a clearance certificate.

Canadian CIT and withholding tax (WHT) can be reduced or eliminated if Canada has a treaty with the non-resident’s country of residence. A list of treaties that Canada has negotiated is provided in the Withholding taxes section, along with applicable WHT rates.

Federal income tax

The following rates apply for a 12-month taxation year ending on 31 December 2023. For non-resident corporations, the rates apply to business income attributable to a permanent establishment (PE) in Canada. Different rates may apply to non-resident corporations in other circumstances. Non-resident corporations may also be subject to branch tax (see the Branch income section).

Notes

1. The basic rate of federal tax is reduced by a 10% abatement to give the provinces and territories room to impose CITs. The abatement is available in respect of taxable income allocated to Canadian provinces and territories. Taxable income allocable to a foreign jurisdiction is not eligible for the abatement and normally is not subject to provincial or territorial taxes.
2. The general rate reduction and manufacturing and processing deduction do not apply to the first CAD 500,000 of active business income earned in Canada by Canadian-controlled private corporations (CCPCs), investment income of CCPCs, and income from certain other corporations (e.g. mutual fund corporations, mortgage investment corporations, and investment corporations) that may benefit from preferential tax treatment.
3. Provincial or territorial taxes apply in addition to federal taxes. Provincial and territorial tax rates are noted below.
4. For small CCPCs, the net federal tax rate is levied on active business income above CAD 500,000; a federal rate of 9% applies to the first CAD 500,000 of active business income. Investment income (other than most dividends) of CCPCs is subject to the federal rate of 28%, in addition to a refundable federal tax of 10⅔%, for a total federal rate of 38⅔%. Access to the reduced federal tax rate on active business income of 9% is restricted for CCPCs that earn passive investment income exceeding CAD 50,000 in the previous taxation year and unavailable at CAD 150,000 of investment income.

Zero-emission technology manufacturers

CIT rates are temporarily reduced on eligible income from zero-emission technology manufacturing and processing activities by 50% (lowering the general rate to 7.5% and the CCPC rate to 4.5%) for 2022 to 2028 (draft legislation extends it to 2031), then these rates will gradually rise back to status quo by 2032 (draft legislation provides an extension to 2035). To qualify for the lower tax rates, at least 10% of the company’s gross revenues from all active businesses carried on in Canada must be derived from eligible zero-emission technology manufacturing and processing activities.

Banks and life insurers

Banks and life insurers and their related financial institutions are subject to the following:

• For taxation years ending after 7 April 2022 (pro-rated for a taxation year that includes 7 April 2022), an additional 1.5% income tax. A CAD 100 million taxable income exemption is available to be shared among group members.
• For the 2022 taxation year, a one-time 15% tax, based on the average of the corporation’s taxable income for taxation years ending in 2020 and 2021. A CAD 1 billion taxable income exemption was available to be shared among group members. The tax liability was imposed in the 2022 taxation year but is payable in equal amounts over five years (i.e. included in the 2022 through 2026 federal tax filings), and the amount required to be payable for that year reduces the Part VI Financial Institutions Capital Tax liability (see Federal capital taxes in the Other taxes section) for that same year.

Global minimum tax and the new international tax framework

138 OECD Inclusive Framework members, including Canada, have agreed to the October 2021 Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, which proposes fundamental changes to the international corporate tax system. The changes would provide new taxing rights that:

• reallocate some portion of the profits of large MNEs to countries where the MNE’s customers are located (Pillar One), and
• adopt a global minimum effective tax rate of 15% (Pillar Two).

Pillar One

The main element of Pillar One is to allocate a formulaic share (Amount A) of the consolidated profit of certain MNEs to the market jurisdictions where the sales arise. Pillar One would apply to MNEs with global consolidated revenues exceeding 20 billion euros (EUR) (expected to be reduced to EUR 10 billion after seven years) and profitability thresholds greater than 10%; Pillar One includes certain exclusions for the regulated financial services and extractive industries. The profit to be reallocated to markets would be 25% of an MNE’s profit before tax that exceeds 10% of revenue.

Pillar Two

Under Pillar Two, the member jurisdictions have agreed to enact a minimum effective tax rate of 15% on profits earned by MNEs in each jurisdiction. This minimum tax would apply to MNEs with global consolidated revenues exceeding EUR 750 million. These MNEs will be required to compute their effective tax rate (ETR) in each country where they operate. If the ETR for a particular country is below 15%, a top-up tax will be imposed to raise that ETR to 15% (this top-up tax may be reduced by a substance-based income exclusion, which is computed based on the payroll costs and net book value of tangible assets located in the jurisdiction). The top-up tax will be collected under two charging rules. The main rule is the Income Inclusion Rule (IIR), which generally requires the ultimate parent of the MNE to pay the top-up tax computed for its foreign subsidiaries (and can also apply in certain other circumstances). The Undertaxed Profits Rule (UTPR) is a backstop rule, which collects any top-up tax that is not collected by the IIR. The UTPR allocates this residual top-up tax amongst all countries in which the MNE group operates (and which have adopted the UTPR), based on the employees and tangible assets located in those countries. A country may also choose to adopt a qualified domestic minimum top-up tax, which is based on the Pillar Two rules, but collects top-up tax on the income of entities located in that country (rather than foreign entities).

Coming into force and other considerations

The OECD originally expected these changes to generally come into effect in 2023 but recently announced that the implementation of Pillar One will be deferred until 2024 at the earliest. Pillar One will require a multilateral convention to be developed and signed by the member jurisdictions and then implemented by each member. Pillar Two will be implemented through enactment or amendment of domestic tax rules by the participating jurisdictions and is expected to generally begin coming into effect in 2024. In its last two federal budgets, the Canadian government:

• confirmed that Canada is currently working with its international partners to develop a multilateral convention to implement the Pillar One rules and that its preference is for a multilateral approach
• stated that if a multilateral convention has not come into force by the end of 2023, Canada’s proposed Digital Services Tax (DST) could take effect as early as 1 January 2022, and
• announced that Canada will implement Pillar Two, along with a qualified domestic minimum top-up tax (which will apply to Canadian members of MNE groups that are within scope of Pillar Two). Draft legislative proposals to implement Pillar Two in Canada were released for consultation in August 2023. The IIR and qualified domestic minimum top-up tax would come into effect for fiscal years of MNEs that begin after 30 December 2023; the UTPR would come into effect for fiscal years of MNEs that begin after 30 December 2024 (for these purposes, an MNE is considered to have the same fiscal year as its ultimate parent entity).

Provincial/territorial income tax

All provinces and territories impose income tax on income allocable to a PE in the province or territory. Generally, income is allocated to a province or territory by using a two-factor formula based on gross revenue and on salaries and wages. Provincial and territorial income taxes are not deductible for federal income tax purposes. The rates given apply for a 12-month taxation year ending on 31 December 2023 and do not take into account provincial tax holidays, which reduce or eliminate tax in limited cases.

Notes

1. When two rates are indicated, the lower rate applies to manufacturing and processing income.
2. In all provinces and territories, the first CAD 500,000 (CAD 600,000 in Saskatchewan) of active business income of a small CCPC is subject to reduced rates that range from 0% to 3.2%, depending on the jurisdiction.
3. The lower Ontario rate applies to profits from manufacturing and processing, and from farming, mining, logging, and fishing operations, carried on in Canada and allocated to Ontario.Corporations subject to Ontario income tax may also be liable for corporate minimum tax (CMT) based on adjusted book income. The CMT is payable only to the extent that it exceeds the regular Ontario income tax liability. The CMT rate is 2.7% and applies when total assets are at least CAD 50 million and annual gross revenue is at least CAD 100 million on an associated basis.
4. The manufacturing and processing reduction from the general rate is determined by multiplying the maximum rate reduction (2%) by the corporation’s allocation of income to Saskatchewan.

Article by PWC