Tax season is always a worrisome time for the leaders of many small and medium businesses. One reason for this is that it is sometimes very difficult to calculate your company’s tax rates in Quebec.
This article has been written with the goal of helping guide you in a clear and concise manner on how to carry out such tax related calculation.
Tax rate calculation in Quebec: how does it work?
First, you should consider filing your T2 return (the official corporate tax return document for businesses in Quebec), as this document is the basis for calculating your corporate tax rates in Quebec. Second, understand that private corporation taxation is limited to one or two fixed brackets in Canada depending on your province. Corporate tax rates are therefore much easier to calculate than personal income tax rates, which are affected by different and increasing rates according to various income brackets.
Before determining your corporate tax rates in Quebec, it is important to know that it applies only to the profits of your business. It is therefore necessary to discount current expenses related to normal business activities, interest expenses, depreciation and amortization when calculating your tax rate in Quebec.
In concrete terms, the basic federal tax rate is 38%, falling to 28% after the federal tax deduction and 15% after the general tax reduction in Quebec. Moreover, thanks to the deduction granted to small businesses, this rate goes down to 10.5% and even to 10% as of January 1, 2017. Rather good news, even if the calculation does not stop here for everyone.
A variable tax rate according to your corporate field of activity as well as income
There are still a few minor things to take into account before defining your SME's exact tax rate. Do not forget that a corporate tax expert can provide a great service in helping file your corporate tax returns in Quebec, without having to worry about completing them all by yourself.
Determining your tax rate based on your income
There is a second distinction for business tax rate calculation in Quebec, one that applies to the first $500,000 of annual "active" income for a business. Technically, the first $500,000 in annual revenues for Canadian-controlled private corporations has a corporate tax rate of 10.5% federally and 8.0% in Quebec, giving a total of 18.5%. For active corporate income exceeding the initial $500,000, the rate increases to 15% at the federal level and 11.9% in Québec for a total of 26.9%.
Small difference for manufacturing businesses: Additional reduction
Manufacturing companies, a true pillar of the Québec economy, are companies that have least 25% of their activities related to manufacturing and processing.
If your business falls into this category, know that your first $500,000 of income has a smaller tax rate of 4% in Quebec or an overall amount of 14.5%. For annual revenues in excess of $500,000, the rate is the same as for all other SMBs, i.e. 26.9%.
Another specificity concerning personal service businesses
A personal service business is a corporation that an individual establishes to provide services to a person who would otherwise be his or her employer. This very specific type of SMB is not subject to the federal tax reduction and therefore has a federal tax rate of 33%. The tax rate in Québec remains the same, at 11.9%.
In total, its corporate tax rate is 44.9%.
If you need more information or clarification regarding the tax rate in Quebec for your SME, do not hesitate to contact one of our specialists. We will be happy to answer all your questions and help your SMB with any tax related assistance.