A Brief Overview of Private Company (CCPC) Taxes in Ontario
This article is written in terms that a typical business owner will understand and avoids getting into deep technical aspects embedded in many of these concepts. Private Company (CCPC) Tax in Ontario is complicated. Business owners are generally familiar with two levels of taxation: Corporate Tax and Personal Tax. How these two types of taxes interact, creates a significant amount of confusion for most owners.
Integration of Corporate and Personal Tax
The Canadian Tax System is meant to be integrated. The basic premise is such that whether you earn income directly from an employer as a salary, or earn income from your business, you would pay about the same amount of tax had you earned this income in a corporation and distributed out all the funds to yourself as the owner.
Tax integration is not perfect, and depending on the province, the effectiveness of integration to equalize the tax outcomes may vary.
Corporate Tax Rates
There are different corporate tax rates depending on the type of income you earn. For a Canadian Controlled Private Corporation, different rates of corporate tax are applied to the streams of income.
01. Active Business Income
02. Investment income
03. Personal Services Income (see our article on contractors for a more detailed discussion of Personal Service Business)
Active Business Income
Most small businesses earn what is referred to as ‘Active Business Income.’ In general, this is the income that the business earns from operations. At the time of writing this article, the combined provincial and federal rate for a Canadian Controlled Private Corporation eligible for the Small Business Deduction is 12.2%.
To put it very broadly, active income is income earned from providing products or services and in general excludes income from investments such as dividends, interest, and royalties.
The government wants to encourage business growth and therefore offers a lower taxation rate on this business income. As noted above, this tax rate, for a business in Ontario is 12.2% and includes both the Federal and Provincial portion of the tax on Small Business income.
Once a business grows, where the taxable income begins to exceed $500,000, the tax rate begins to increase and eventually plateaus at 26.5%. There are also other situations where there will be a loss of the small business rate such as when a business has taxable capital in excess of $10,000,000 or passive income earned in a corporation exceeds $50,000. For many small businesses, these limits will not be breached, so they will be taxed at the lower 12.2% rate.
Although it may seem like the flat corporate tax rate is attractive to those looking to minimize tax, if all the funds are required from the corporation for personal use, a corporation does not provide any corporate tax benefit.
The taxation benefit for the average small business is in tax deferral. The more funds that can be left behind in a corporation, the longer it avoids being taxed at the personal tax level. For this reason, many business owners pay themselves a minimal salary.
In 2022, a salary of $64,900 will provide the maximum CPP contribution from an employer/employee perspective, so some owners may choose to maximize their contributions while leaving the remainder of the profit in the company to re-invest.
Re-investing in your company can help mitigate your taxes significantly.
Currently, the Federal Government has two significant programs in place.
02. Immediate Expensing of up to $1.5 million
Without getting into the detail of each program, in essence, these programs allow businesses to make capital investments and receive a relatively high upfront deduction. In absence of these provisions, businesses making capital expenditures are only able to deduct the costs over a period of time.
Depending on the type of capital purchase, this could take many years. With these new provisions, businesses will receive these deductions on an accelerated basis and as a result of the Immediate Expensing provision, in some cases a full deduction in the year of purchase.
Combine Low Corporate Tax Rates with Re-investing
Above, we can see that in Canada we have a low corporate tax rate for Small Businesses and now the Tools to receive upfront write-offs.
A growing business could significantly benefit from the following strategy:
01. Leave excess funds above and beyond personal requirements in the business and thus avoiding unnecessary personal tax.
02. Use the excess funds to invest in growing the business, ie: machinery or equipment that makes the business more competitive or enhances scale.
Excess funds received beyond this could be strategically invested through various mechanisms such as holding companies, tax-free withdrawals into an RRSP, individual pension plans, etc.
Done strategically, re-investing can defer taxation which will provide overall higher wealth. In a future article, we’ll look at investments within a holding company.
At NG Chartered Professional Accountants PC, providing tax consulting is always a customized individualistic approach. The tax laws are inherently complex and each owner’s business situation, family structure, dynamics, and investing strategies are different.
Even owners operating in the same industry or field will very likely have different strategies to optimize what is right for them.
Determining the best outcome involves upfront conversations, an understanding of an owner’s business, and in many cases their processes and financial acumen. This aspect is often overlooked by many advisors in the quest for achieving economies of scale by providing a one size fits all or industry approach.
A common basic question is “what is the best way to reduce my personal taxes, a salary, or a dividend?”
Usually, a short answer to this binary question is expected.
However, the correct response involves a deep understanding of the owner’s entire situation. As we can see from above, there is an integration between corporate and personal taxes, so planning needs to be done considering both aspects.
To properly determine the best outcome for a client, the answer lies in determining the overall objectives of a client. For example, paying a salary provides RRSP room and requires CPP contributions. It also requires the generation of a T4 slip, which banks and mortgage advisors often require for proof of income when borrowing.
An owner may have already spent the past 20 years building up investments within a holding company and paid themselves via dividends historically, and will self-fund their future. In this case, they will likely have refundable taxes (this concept is discussed in our investment income article) in their holding company, to which a dividend payment is required to refund these balances to the company. In this case, they may be more inclined to pay themselves a taxable dividend.
In another instance, a successful business owner may have significant cash surpluses in the business and want to reduce taxes while aggressively saving for retirement. In this case, a payment of a salary would facilitate an RRSP, or in a somewhat less common situation, funding through an Individual Pension Plan.
Another owner may own Corporate Class Funds within their holding company and wish to prioritize the payment of Capital Dividends to avoid their Old Age Security from being clawed back, or they may be expecting a high-income year and want to mitigate taxes but maximize cash flow.
The point is, a personalized approach, which takes time, focus, and effort is required to achieve business financial excellence. I am of the strong belief that business owners receive the best outcomes working with advisors and consultants that can provide unbiased and well-thought-out strategies.
If an owner meets with their accountant or investment advisor once a year or has to wait weeks on end for a response, this is usually a strong indicator that aspects of their financial well-being are being underserved.
A good plan requires the consideration of several scenarios with Tax Specialists and Financial Advisors working together to help clients navigate the increasingly complex tax system and financial products.
Our London, Ontario corporate accounting firm is currently accepting new clients. If you would like more information on Private Company (CCPC) Taxes in Ontario or the services we offer, please visit our contact us page. You can also learn more about our services here and get to know our London, Ontario team here.