Corporate Tax
Corporate tax is a complex subject, to be discussed in detail with your lawyer or accountant.
Briefly speaking, however, like an individual, a corporation is subject to both federal and provincial tax.
Unlike an individual’s income tax, which have “progressive” rates (i.e. the rate of tax increases as income increases), corporations are subject to flat rates of tax. The rate depends only on the type of corporation and the source of income.
For an individual earning money through a corporation, there is a potential for “double taxation”. This is because the corporation pays tax, then gives a dividend to the individual shareholder, and then the individual pays tax again on his or her income (including the dividend). For Canadian corporations, tax laws attempt to minimize the effect of double tax, by grossing up dividends in the individual’s return to the approximate amount earned before tax at the corporate level. A tax credit is then given to the shareholder to approximate the amount of tax previously paid by the corporation (the “dividend tax credit”).
Generally speaking, however, the tax is never perfectly “integrated”, and business income can often be saved by careful planning. If you are the sole shareholder, director, and president of the company, you may be able to choose, to some extent, how to compensate yourself out of business profits: you could pay yourself an increased salary for being president, or a bonus; you could increase director’s fees; you could increase dividends, or you could have the company buy back some your shares. Each form of compensation is taxed differently, and by choosing a combination of them, you may be able to save money.