How Are Businesses Taxed in Canada?

As a business owner in Canada, understanding how your corporation is taxed is crucial. Taxes can significantly impact your profits, and knowing the rules can help you plan effectively. Whether you’re running a small business or a large corporation, the Canadian tax system categorizes income in specific ways, each with its own tax treatment.

How Business Income is Taxed in a Corporation

Your corporation’s earnings generally fall into two categories:

1. Active Business Income (ABI): This is the money your corporation makes from running its core business—selling products, providing services, or any operations that generate revenue.
   1. The good news? If your business qualifies for the Small Business Deduction (SBD), the first $500,000 of ABI is taxed at a lower rate (about 12-15%), depending on the province.
   1. Any income above $500,000 is taxed at a higher corporate tax rate (26-31%).
2. Passive Income: This includes money earned from investments, rental properties, dividends, interest, or capital gains inside your corporation.
   1. The downside? Passive income is taxed at a much higher rate (about 50%).
   1. However, a portion of this tax is refundable when your corporation pays dividends to shareholders.

Why Business Owners Should Be Aware

If your corporation earns passive income, you need to be cautious. Once passive income exceeds $50,000 per year, it starts reducing your Small Business Deduction, meaning you could pay higher taxes on your active business income too!

Without a proper understanding of these tax rules, business owners may find themselves facing unexpected tax bills and reduced profitability.

How Corporate Taxes Affect Business Decisions

The way corporate income is taxed influences many aspects of business operations, including:

• How much profit is reinvested in the business
• The best way to pay yourself (salary vs. dividends)
• How and where to invest corporate funds
• Whether to hold investments personally or in the corporation

Understanding these factors can help business owners make informed financial decisions that align with their long-term goals.

Know the Tax Rules, Protect Your Profits

Canadian business taxation can be complex, but being aware of how your corporation is taxed is the first step to making informed financial choices. Whether you operate a small business or a growing enterprise, knowing the difference between active and passive income, corporate tax rates, and how different revenue streams are treated is essential for financial success.

At WiseInvest®, we believe knowledge is the first step toward financial success. Understanding business taxation is essential, but navigating it alone can be overwhelming.

📞 Curious about what these tax rules mean for your business? Let’s talk.