|Canadian Controlled Private Corporations|
CCPC's earning active income (eg: not rental or investment) are taxed at favourable rates up to the "small business threshold" of taxable income. Active income can include incidental amounts of interest income.
Currently the basic federal corporate tax rate is 38%. From that there are reductions of 10% for companies resident in any province and 16% for being a CCPC with taxable income below the small business threshold. A surtax of 4% on the 28% rate is also calculated.
Therefore, the effective federal tax rate for a CCPC is 13.12%
For many years the small business threshold has been $200,000. Commencing in 2003 that level has been increased in $25,000 increments by the Federal government with the objective of increasing the threshold to $300,000. Some provinces immediately moved to a threshold of $300,000 or more and some are following the Federal government's system. The 2004 Federal budget accelerated the plan such that the $300,000 threshold is reached in 2005 rather than 2006. The small business threshold is prorated for CCPC's with non-calendar fiscal years.
On income in excess of the small business threshold, the federal tax rate is 29.12% less the federal rate reduction applicable to the taxation year. In 2004 the rate reduction is 3% and the ultimate target for the rate reduction is 7%.
Provincial income taxes are applied to taxable income, not federal taxes. In BC the rates are 4.5% on income below the small business threshold and 13.5% on excess income.
Combined corporate taxes for a CCPC resident in BC are 17.62% up to the small business threshold and 39.62% thereafter.
Investment income includes real estate rental, interest and capital gains income. These forms of income are neither eligible for the 16% federal tax reduction, nor the small business provincial tax rate.
A portion of the federal tax is refundable to the corporation if taxable dividends are paid out to the shareholder(s) of the company. There is no refund on the provincial taxes.
Dividends from Canadian companies are taxed at 33-1/3% and this amount is refundable when taxable dividends are paid out.
A shareholder of a CCPC can receive the after-tax cash in the corporation on the payment of a dividend by the company. This will result in taxes being paid by the recipient of the dividend.
A CCPC would have roughly $82 for every $100 of low rate taxable income available for dividends. After paying personal taxes (assumed to be at the highest marginal rates in BC), the shareholder would have about $56 of disposable cash. For every $100 of high rate taxable income the company would have about $60 available for dividends which would yield roughly $41 of after-tax cash to the shareholder.
It is common for a small business to bonus income down to the small business threshold level to avoid the higher taxes.
Another planning point is that dividend income is not eligible for CPP or RRSP contributions.