9.2 What are the similarities and differences between how tax payable is determined for individuals and corporations? (Overview)

Sam Newton

9.2 What are the similarities and differences between how tax payable is determined for individuals and corporations? (Overview)

Sam Newton

What are the similarities and differences between how tax payable is determined for individuals and corporations?

Calculating Net Income For Tax Purposes (NITP) and, to some extent, Taxable Income is very similar for both individuals and corporations. The biggest differences show up in the way Taxable Income is actually taxed. We’ll look into these similarities and differences in more detail below.

Similarities

NITP – Corporations and individuals both follow the Section 3 ordering rules. The only real difference when calculating NITP is that some types of income and expenses really only relate to individuals (spousal support, employment income, child care expenses) and we wouldn’t expect them to be part of a corporate tax return.

Taxable Income – Division ‘C’ deductions, which get us from NITP to Taxable Income, are also very similar although there are a few key differences as follows:

Item	Personal tax treatment	Corporate tax treatment
Charitable donations	Personal tax credit (ITA 118.1)	Division ‘C’ deduction (ITA 110.1(1))
Capital Gains Deduction	Division ‘C’ Deduction (ITA 110.6)	Not available to corporations
Dividends from Canadian Corporations (other than capital dividends)	Included in property income (NITP) and receive dividend tax credit	Division ‘C’ deduction (ITA 112), then dividends are taxed under Part IV of the ITA

Tax Rates and Process

The key difference between corporate and individual tax returns is how taxable income is actually taxed. For individuals, taxable income (regardless of the type of income) is grouped together and taxed using the progressive tax brackets. For corporations, the type and amount of items included in taxable income matters and is taxed as follows:

Taxable Income Element	Corporate Tax Process
Active Business Income (ABI) <= the Small Business Deduction Threshold	Taxed at a very low rate to encourage small businesses.
Active Business Income (ABI) > the Small Business Deduction Threshold	Taxed at a moderate rate
Passive income (interest, some rental income etc.)	Taxed at an extremely high rate to discourage having passive income in a corporation. The intention is for corporations to focus on active business and flow any extra cash/passive items out to shareholders.

Note, the above elements apply primarily to Canadian Controlled Private Corporation (CCPC’s). Public corporations (and non-CCPC’s) are not eligible for some of these items (like the Small Business Deduction)

Here are the corporate tax rates based on the type and amount of income. These specific elements will be addressed in more detail later on in the book.

	CCPC ABI<= SBD	CCPC ABI > SBD	CCPC Passive income	Non CCPC	ITA
Basic Rate	38%	38%	38%	38%	123(1)(a)
Provincial Abatement	(10%)	(10%)	(10%)	(10%)	124(1)
Small Business Deduction	(19%)	NA	NA	NA	125(1) & 125(1.1)
General Rate Reduction	NA	(13%)	NA	(13%)	123.4(2)
Additional Refundable Tax	NA	NA	10.7%	NA	123.3
Total federal tax rate	9%	15%	38.7%	15%

As you can see, for CCPC’s, Active Business Income below the Small Business Deduction limit is taxed at a very low rate (9%), passive income is taxed at a very high rate (38.7%), and all other income is taxed at 15%. This stratification and different tax treatment of the various types of income is the main difference between the taxation of corporations and individuals.