Canada Corporate Tax Filing and Planning

The TOSI (Tax on Split Income) rules, introduced in 2019, are designed to prevent Canadian business owners from splitting income with spouses, children, and other family members through corporate dividends. While income splitting can effectively reduce the overall family tax burden, dividends classified as TOSI are taxed at the highest marginal rate of 53%. Fortunately, there are exceptions to these rules. For instance, adult family members who are actively involved in the business and receive a reasonable dividend for their contributions instead of a salary may qualify for an exception. Additionally, businesses outside the service sector can also be exempt if they meet the following criteria: (a) the shareholder is at least 25 years old, (b) less than 90% of the company’s revenues come from services, and (c) the business is not a professional corporation.

Holding a rental property through a holding corporation offers significant advantages, including limited liability for shareholders and easier succession planning for future generations. However, there are notable disadvantages, such as (a) difficulty qualifying for a corporate mortgage, (b) a higher corporate tax rate of 50.17% on net rental income, and (c) a capital gains tax rate of 33% for corporations compared to 26.5% for individuals. These factors should be carefully weighed when deciding how to hold your rental property.

The RDTOH account applies to Canadian-controlled private corporations (CCPCs) earning passive income, such as rent, royalties, interest, and dividends. This account increases by $30 for every $100 of passive income earned. Corporations can also receive a tax refund by utilizing their RDTOH balance, with a refund rate of 38 cents for every dollar of dividends paid to shareholders. Incorporating the RDTOH account into your corporate tax planning is essential for maximizing tax efficiency.

The small business deduction allows associated CCPCs to benefit from a lower corporate income tax rate of 12% on annual business profits up to $500,000. Profits exceeding this threshold are taxed at a rate of 26.5%. To maximize the small business deduction (SBD), consider creating multiple corporations owned by different family members. For example, if your wife owns 100% of Wife Co. and you own 100% of Husband Co., both corporations can each claim their SBD limit of $500,000, totalling $1,000,000. It’s crucial to consult with a corporate tax planner in Mississauga or Toronto before implementing such strategies to ensure compliance and effectiveness.

The recipient corporation, such as a holding company, can claim a tax deduction under Section 112 of the Canadian Income Tax Act for dividends received from a connected corporation. A corporation is considered connected if the parent corporation owns at least 10% of its shares. These dividends are reported on Schedule 3 of the T2 corporate tax return.

A capital dividend is a tax-free distribution paid from a Canadian Controlled Private Corporation’s (CCPC) capital dividend account. Before payment, necessary paperwork must be approved by the CRA, including a director’s resolution for declaring the capital dividend, Schedule 89 (to verify the capital dividend account balance), and Form T2054 (election for a capital dividend).

Shareholders are required to pay personal income tax on loans received from their corporation unless the loan is repaid within one year of the corporation’s year-end. Exemptions exist for employee car loans and employee home loans, provided the loan was issued due to the individual’s employment and not preferential treatment as a shareholder.

You may avoid Canadian taxes on profits earned by a foreign corporation if you can demonstrate (a) a valid business reason for operating through an offshore company and (b) that the mind and management of the foreign corporation reside in that jurisdiction. For instance, if you incorporate a marketing agency in Barbados, hire local employees, and have management based there, you may not owe Canadian taxes on the profits generated, provided there's a legitimate reason for the business setup.

The definition of ‘permanent establishment’ is outlined in Canada’s tax treaties with various countries. Generally, it refers to a fixed place of business, such as a retail store, office, or factory. If your corporation has a permanent establishment in a foreign country, it must pay corporate income taxes to that country on profits earned there. For example, if a Canadian corporation opens a bakery in the U.S., it will be required to pay U.S. income tax on the profits from that location. It's advisable to consult an experienced corporate tax accountant in Mississauga or Toronto before expanding your business internationally.