Corporate taxation in Quebec is a complex and time-consuming process. To better understand it, it is important to a grasp a few key concepts.
The different types of corporate income
Firstly, many different sources of income exist and they are all 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.)
Active business income:
In most cases, active business income is derived from a commercial source and is to be completed on Schedule 7 of your corporate tax return.
The business will have to apply a tax rate of approximately 19% on its taxable income. This includes both federal and provincial tax.
Note that this tax rate applies only to the first $500,000 of taxable income. Higher taxable income is taxed at a rate of approximately 27%. Calculating corporate taxation may seem complex, but these rules will help guide you.
Investment income includes all interest plus the taxable portion of capital gains, rents, royalties and all other property income. Dividends are subject to a different calculation.
In 2021, the federal tax on investment income is approximately 38% plus 11.5% at the provincial level. For Quebec, this amounts to a tax rate of approximately 50%.
However, there is a way to reduce this tax rate. Investment income is subject to a 30.67% refundable dividend tax on hand (RDTOH). This tax is refundable at a rate of 38.33% when taxable dividends are paid.
Quebec companies receiving dividend income must file a tax return. When they receive these dividends, companies receive a tax refund based on the amount of these dividends.
Two types of dividends exist:
- Eligible dividends: when the company is public, the dividend is grossed up by 38% with a tax credit of 15% at the federal level and 11.7% in Quebec.
- Ordinary dividends (or non-eligible): When the corporation is not taxed under the general system, the gross-up is only 15% with a tax credit of 9% at the federal level and 4% in Quebec.
A mistake to avoid when taxing a business in Quebec
The Quebec tax system allows small and medium-sized enterprises (SMEs) to include approximately 19% of its taxable income (taxable profit) in its active business income. It is therefore tempting to choose this option to reduce corporate taxes.
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.
However, 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).
Therefore, taxpayers in charge of SIBs and PSBs are unable to avoid personal income tax. This is an important mistake to avoid.
Let us at T2inc assist you with your corporate tax return
At T2inc, we know it can be confusing to calculate your corporate taxes in Quebec. We have therefore set up an online tax software to assist you.
Not only will it save you time, our T2inc experts are committed to studying your case to offer you the best possible quote and save you money. If you have any questions, we invite you to contact us today.
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