Quebec corporate tax guide
Corporate taxation in Quebec is a complex and time-consuming process. We will help clarify some essential notions.
First, different sources of income exist and they are taxed separately. Here are some of the main sources of income:
- Active business income
- Dividend income
- Rental income
- Capital gains income
- Investment income (interest, royalties, etc.)
Let's take the following example:
A Canadian tax resident who is a 100% shareholder of a corporation incorporated in Quebec.
His company qualifies as a Canadian-controlled private corporation (CCPC) and is not considered a large corporation. This person provides computer consulting services at home for people in his or her neighbourhood and designs websites. The company has more than 100 clients, has its own website and publishes in the local newspaper to find customers.
Active business income:
The corporation will have to pay an approximate 19% federal and provincial combined tax rate on its taxable income (profit = income less expenses). In simpler terms, this means the profit on these sales after expenses. Note that this rate only applies on the first $500,000 of taxable income. Taxable income in excess of $500,000 is taxed at a rate of approximately 27%.
Taxable capital gains, interest income, rent and royalties are taxable at approximately 47%. However, there is a mechanism to reduce this tax rate when taxable dividends are paid. These mechanisms are the Refundable Dividend Tax on Hand (RDTOH) and the Dividend Refund (RTD). Due to their complexity, we will not cover these concepts. You can consult this article to get an idea of the concepts of RDTOH and RTD:
Dividend income, which is also difficult to understand, will be discussed in another article. However, to give you an idea, dividends are subject to Part IV tax at a rate of approximately 33.33%. These amounts of Part IV tax are also included in the concepts of RDTOH and RTD, but are somewhat more complicated for dividends, depending on who paid the dividend (connected company or not).
Here are two links for more details on the tax rates:
The infamous 19% corporate tax rate in Quebec
In effect, Québec's tax system allows incorporated SMEs to pay approximately 19% of their taxable income (tax profit) on active business income.
The first reflex for some of us who are a little more "cunning": Think about paying around 35%-48% personal tax with employment income at work and create a company to handle real estate income and/or investment income. Or simply, ask the employer to no longer be paid as an employee, but rather as an incorporated subcontractor.
It's not that simple, unfortunately. First, we need to ask ourselves the following question: "What is active business income?"
The Income Tax Act defines an "active business" as any business operated by a taxpayer resident in Canada other than a specified investment business (SIB) or a personal services business (PSB).
The definitions of "SIB" and "PSB" prevent taxpayers from avoiding personal income tax by incorporating into a corporation for investment, rental or employment income.