(Disponible en français : Impôt sur le revenu des sociétés au Canada : recettes, taux et justification)
Governments can finance the goods and services provided to citizens through various means, including through taxing, investing and borrowing. The first – taxation – can take several forms.
In Canada, federally funded or federally sponsored initiatives are mainly financed by personal income taxes, corporate income taxes, consumption taxes and social security contributions.
This HillNote analyzes revenue, rates and rationale relating to corporate income taxes. Other HillNotes discuss these factors for personal income taxes, consumption taxes and social security contributions.
As shown in Figure 1, in 2015–2016, corporate income tax revenue was the fourth largest contributor to federal tax revenue and social security contributions, at $41.4 billion, or 11.7%. Between 1984–1985 and 2015–2016, this percentage ranged from 5.2% to 14.4%.
Figure 1 – Federal Tax Revenue and Social Security Contributions, 2015–2016 ($ billions)
Notes: “Social security contributions” are Canada Pension Plan and Quebec Pension Plan (CPP and QPP) contributions, and Employment Insurance premiums. While the QPP operates exclusively in Quebec, QPP contributions are combined with contributions to the CPP, which operates in the rest of Canada, thereby giving rise to the term “federal.” “Corporate income taxes” includes the capital tax on financial institutions. “Other taxes and revenues” are non-resident income taxes, revenue from federal Crown corporations, net foreign exchange revenue and revenue from other programs.
Sources: Figure prepared by the authors using data obtained from: Statistics Canada, “Table 385–0032: Government finance statistics, statement of government operations and balance sheet, quarterly,” CANSIM (database), accessed 31 January 2016; and Receiver General for Canada, Public Accounts of Canada 2016 – Volume 1, 2016.
Canadian corporations pay tax on their taxable income earned worldwide, while foreign corporations pay tax on their taxable income earned in Canada.
Companies’ taxable income is equal to their revenue less:
- current expenditures, which are deducted in the year in which they are paid and include wages, fees, rent, production inputs and interest on borrowings;
- purchases of capital goods, such as buildings and machinery, which are deducted over time according to prescribed rates for different classes of depreciable assets; and
- business losses, which are deducted for past years or in subsequent years.
Corporations pay the basic corporate income tax rate, with rate reductions provided in some cases. Table 1 shows the rates of taxation, less rate reductions, that have been applied on corporate income in selected years between 1960 and 2017.
Since 1988, the basic corporate income tax rate has been 38.0%. Corporations that pay provincial/territorial corporate income tax receive a 10-percentage-point federal abatement, which lowers the corporate income tax rate to 28.0%.
Since 1973, corporate profits from manufacturing and processing activities have been eligible for a tax rate reduction. As well, since October 2000, sectors not already entitled to lowered corporate income tax rates have been eligible for the general rate reduction; this reduction is currently 13.0%.
In 2004, the general rate reduction became the same percentage as the rate reduction for manufacturing and processing activities. As a result, the preferential tax treatment for profits from manufacturing and processing activities was eliminated.
Depending on the amount of taxable capital employed in Canada, small Canadian-controlled private corporations (CCPCs) are taxed at a lower corporate income tax rate than are other corporations. The following rates are applied:
- CCPCs with taxable capital below $10 million – 10.5% on the first $500,000 of taxable income; and
- CCPCs with capital between $10 million and $15 million – the small business deduction threshold of $500,000 is reduced at a rate of $1 per $10 of capital exceeding $10 million.
CCPCs with taxable income exceeding $15 million do not qualify for the small business deduction.
Beginning in 1968, the federal government imposed a corporate surtax equal to 3.0% of the general corporate income tax. It was eliminated, then reinstated as a percentage of the difference between the general corporate income tax rate and the federal abatement. It was then eliminated again effective January 2008.
The federal government started to tax the capital of financial institutions in 1985, and of large corporations in 1989; the latter tax was eliminated in January 2006. Financial institutions continue to be subject to a tax of 1.25% on taxable capital exceeding $1 billion used in Canada, but they can reduce their federal capital tax payable by the amount of federal income tax payable.
Recent federal corporate income tax rate reductions in Canada are consistent with a global trend. Between 2006 and 2016, 21 of 35 Organisation for Economic Co-operation and Development (OECD) countries lowered their statutory corporate income tax rates.
Figure 2 shows statutory corporate income tax rates for all levels of government in selected OECD countries for 2006 and 2016.
Figure 2 – Statutory Corporate Income Tax Rates, All Levels of Government, Selected Countries, 2006 and 2016
Source: Figure prepared by the authors using data obtained from: Organisation for Economic Co‑operation and Development, “Table II.1. Corporate income tax rate,” OECD.Stat (database), accessed 13 February 2017.
The federal corporate income tax rate reductions have contributed to a lowering of Canada’s corporate marginal effective tax rate (METR), which measures the actual tax rate paid. In 2016, Canada is estimated to have had the second-lowest corporate METR among G7 countries. Figure 3 shows the METR of G7 countries in 2016.
Figure 3 – Marginal Effective Tax Rate on Business Investment, G7 Countries, 2016
Note: The Department of Finance’s calculation of the marginal effective tax rate on business investment includes all measures announced as of 1 January 2016 and measures that were expected to have been in effect by December 2016. The calculation excludes the resource and financial sectors, as well as tax provisions related to research and development.
Source: Figure prepared by the authors using data obtained from: Department of Finance, Growing the Middle Class, 22 March 2016, p. 21.
Through the Business Profits War Tax Act, Canada’s federal government introduced a corporate income tax in 1916 to help fund the country’s involvement in the First World War. A corporate surtax was implemented in 1968 and, in 1985, capital began to be taxed as part of an effort to increase corporations’ contribution to total federal tax revenue.
In the corporate context, income may be taxed twice, first when it is earned by a corporation, and then when shareholders receive dividends that are taxed as personal income. To meet the Canadian tax system’s objective of taxing income only once, corporate income tax could be eliminated and personal income alone could be taxed.
However, there are a variety of reasons for maintaining a corporate income tax system. First, not all corporate income is immediately distributed to shareholders as dividends and thereby taxed as personal income. Instead, some income may be kept within the corporation as retained earnings, which may increase share prices and generate capital gains for shareholders; in Canada, one half of the value of capital gains is included as personal income. Since capital gains are treated as the shareholders’ personal income only once the shares are sold and the gains are realized, levying a corporate income tax results in more timely collection of tax revenue.
Second, at least some corporate income may be distributed to foreign shareholders, where the taxation of Canadian-source income occurs consistent with tax treaties. Depending on the provisions of particular treaties, it is possible that this Canadian-source income would not be taxed. In this case, Canadian taxation of corporate income would ensure that at least some tax revenue is collected.
Recognizing that there are reasons to maintain a corporate income tax, Canada has implemented measures to limit double taxation. For example, the value of taxes paid by Canadian corporations is returned to shareholders through the dividend tax credit, which reduces the incidence of double taxation.
Corporate income taxation can have negative consequences for investment, corporate finance, consumers and employees. For example, since corporate income tax is applied on the return on investment, it may affect a corporation’s decision to make new investments.
Furthermore, the deductibility of interest from taxable corporate income may lead corporations to rely more heavily on debt than on equity to fund their investments, with the potential for higher risk of default or bankruptcy.
Finally, the corporate income tax burden may be shifted to consumers through higher prices and/or to employees through lower compensation. According to the Canadian Tax Foundation, a large portion of this burden is passed on to employees.
Heather Kerr, Ken McKenzie and Jack Mintz, eds., Tax Policy in Canada, Canadian Tax Foundation, Toronto, 2012, pp. 7–31.
Canada Revenue Agency, Corporate Statistical Tables (2009 to 2013 tax years), 13 October 2016.
Canada Revenue Agency, T2 Corporation – Income Tax Guide – 2016, 30 January 2017.
Authors: Simon Richards and Dylan Gowans, Library of Parliament