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Return to Corporations

What's new

Corporate tax administration for Ontario

On October 6, 2006, the Government of Canada signed a Memorandum of Agreement with the Government of Ontario that will lead to the Canada Revenue Agency administering Ontario provincial corporate income tax. For more information, see Single Administration of Ontario Corporate Tax.

CRA using two-dimensional (2D) bar codes on income tax returns

Beginning in fall 2006, the newest versions of CRA certified software will produce two dimensional (2D) bar codes for computer-generated returns. The 2D bar codes will contain the identification information and financial data and will be printed on the first page of the T2 RSI, Return and Schedule Information.

2006 federal budget

The following changes were announced in the federal budget of May 2, 2006.

Small business deduction - The small business deduction rate will be increased to 16.5% effective January 1, 2008, and to 17% effective January 1, 2009.
Business limit - The business limit will be increased from $300,000 to $400,000, effective January 1, 2007.
General tax reduction - The general tax reduction will be increased to 7.5% effective January 1, 2008, to 8% effective January 1, 2009, and to 9% effective January 1, 2010.

For tax years that begin after May 1, 2006, corporations can benefit from the general tax reduction only on the taxable income that is subject to the general income tax rate of 38%.

Corporate surtax - The corporate surtax will be eliminated for all corporations, effective January 1, 2008.
Investment tax credit expenditure limit - For tax years that end after 2006, the $2 million expenditure limit used in the calculation of a CCPC’s refundable investment tax credit (ITC) on qualifying expenditures for scientific research and experimental development (SR&ED) will begin to be reduced when its taxable income for the previous tax year reaches $400,000 and will become nil at $600,000.
Carry-forward period for non-capital losses and investment tax credits - Non-capital losses, farm losses, and restricted farm losses incurred and investment tax credits earned in tax years ending after 2005 can be carried forward 20 years.
Federal capital tax - The federal capital tax (Part I.3) on the taxable capital employed in Canada by large corporations is zero, effective January 1, 2006.
Filing of a return by a large corporation - For the 2006 and subsequent tax years, if the taxable capital employed in Canada of a corporation and its related corporations is over $10 million, the corporation is considered to be a large corporation and it must file the required returns or be subject to a penalty.
Minimum tax on financial institutions - Effective July 1, 2006, the minimum tax (Part VI) on financial institutions applies to taxable capital employed in Canada in excess of $1 billion.
Capital cost allowance - To qualify for the 100% capital cost allowance rate provided under Class 12, the cost limit of certain property such as small tools, kitchen utensils, and medical or dental instruments acquired after May 1, 2006, is increased from $200 to $500. Electronic communication devices and electronic data processing equipment acquired after May 1, 2006, are excluded from this class.

Eligibility for the new 50% rate in Class 43.2 is extended to cogeneration systems that use a type of biomass, referred to as “spent pulping liquor”, used in the pulp and paper industry, acquired on or after November 14, 2005, that have not been used or acquired for use before that date.

Apprenticeship job creation tax credit - This is a new credit introduced to encourage employers to hire new apprentices in eligible trades. This measure provides eligible employers with a non-refundable tax credit equal to 10% of the salaries and wages paid to qualifying apprentices after May 1, 2006, to a maximum credit of $2,000 per year, per apprentice. Where one or more related employers employ an apprentice, only one employer may claim the $2,000 limit. The amount of the credit is added to the corporation’s investment tax credit pool and is available to reduce taxes payable for the tax year. An unused amount may be carried back three years and forward 20 years.
Eligible dividends - An eligible dividend is any dividend paid after 2005 to a resident of Canada by a Canadian corporation that is designated by that corporation to be an eligible dividend. A corporation’s capacity to pay eligible dividends depends mostly on its status.

If a corporation is a Canadian-controlled private corporation (CCPC) or a deposit insurance corporation, it can pay eligible dividends only to the extent of its taxable income that has not benefited from the small business deduction or any other special tax rate. A CCPC will be able to elect to forego the small business deduction in exchange for being able to pay eligible dividends without giving up any other benefits of CCPC status.

A corporation resident in Canada that is neither a CCPC nor a deposit insurance corporation can pay eligible dividends in any amount unless it has any taxable income that benefited from the small business deduction. In this case, the corporation will have to reduce this taxable income by paying out regular dividends before it can pay an eligible dividend.

A penalty applies (Part III.1 tax) if a corporation represents dividends as eligible dividends that exceed its capacity to pay such dividends. In the case of a CCPC, the penalty applies on the eligible dividends that exceed its taxable income that has not benefited from the small business deduction. In the case of a non-CCPC, the penalty applies to the eligible dividends that exceed its taxable income that has benefited from the small business deduction. The penalty is equal to 20% of the excess eligible dividend.

The corporation will advise the dividend recipient that it is an eligible dividend in writing when the dividend is paid.

Donations of publicly-listed securities and ecologically-sensitive land - For gifts of certain securities and ecologically-sensitive land made after May 1, 2006, the capital gains inclusion rate is zero.
Non-deductibility of interest and penalty interest - For tax years beginning on or after April 1, 2007, interest and penalty interest charged under the Excise Tax Act (GST) and the Air Travellers Security Charge Act, is no longer deductible for income tax purposes.
Withholding of refunds and rebates - Effective April 1, 2007, the payment of refunds and rebates will be withheld until all required returns, of which the Minister of National Revenue has knowledge, have been filed.
Offset of credit amounts - Effective April 1, 2007, any refund the corporation may be entitled to will be automatically applied to any outstanding liabilities on the same or related Business Number account. Any difference will be refunded if all required returns for the account have been filed.

2006 provincial and territorial budgets

The following changes were announced in the different provincial and territorial budgets. The Web pages specific to each province or territory have not been updated to reflect these changes at this time.

British Columbia

[2006-02-21 Budget]
British Columbia royalty and deemed income rebate - British Columbia intends to eliminate its royalty and deemed income rebate and harmonize with the federal taxation of the resource sector, effective for tax years starting after 2006.
British Columbia Film and television tax credit - The additional basic tax credit will be extended to April 1, 2008 (Basic tax credit and additional basic tax credit). The definition of 'designated Vancouver area' has been broadened and includes Peat Meadows in the eastern part (Regional tax credit where principal photography begins before April 1, 2003 and Regional tax credit where principal photography begins after March 31, 2003).
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British Columbia production services tax credit - The additional production services tax credit will be extended to June 1, 2008. The definition of 'designated Vancouver area' has been broadened and includes Peat Meadows in the eastern part.

Manitoba

[2005-10-27 Speech from the Throne]
Manitoba tax rate - The higher rate of Manitoba income tax is reduced to 14.5% effective January 1, 2006.
[2006-03-06 Budget]
Manitoba tax rate - The higher rate of Manitoba income tax will be reduced to 14%, effective January 1, 2007.
Manitoba tax rate - The lower rate of Manitoba income tax will be reduced to 3%, effective January 1, 2007.
Manitoba co-operative education tax credit - This credit becomes fully refundable for work placements ending in 2006 and after.
Manitoba co-op graduates hiring incentive - As part of the Manitoba co-operative education tax credit, this refundable credit is offered to employers as an incentive to hire and retain students who graduate after March 6, 2006, from a recognized post‑secondary co‑operative education program.
Manitoba manufacturing investment tax credit - This credit is renewed for a further three years to June 30, 2009.
Manitoba refundable manufacturing investment tax credit - The refundable portion of the Manitoba manufacturing investment tax credit is increased from 20% to 35%.
Manitoba odour-control tax credit - The credit is extended to eligible expenditures made before January 1, 2010. For 2006 and later tax years, anaerobic digesters are eligible capital property. Agricultural corporations are eligible for a new refundable portion of this credit up to a maximum of the property taxes paid for the calendar year ending within a tax year after March 6, 2006.
Multi-tiered partnerships (Manitoba) - A corporation that is a member of a tiered partnership will be eligible for the Manitoba investment tax credit, research and development tax credit, and the odour‑ control tax credit on the eligible expenditures incurred by the tiered partnership.

New Brunswick

[2006-03-28 Budget]
New Brunswick tax on large corporations - This tax will be gradually reduced over the next four years and will be totally eliminated in 2009. It is reduced to 0.25% in 2006.
New Brunswick tax rate - The higher rate of New Brunswick income tax will be reduced to 12%, effective January 1, 2007.

Northwest Territories

[2006-02-02 Budget]
Northwest Territories tax rate - The higher rate of Northwest Territories income tax is reduced to 11.5% effective July 1, 2006.

Nova Scotia

[2006-05-09 Budget]
Nova Scotia tax on large corporations - The phase-down schedule is extended to another four years until the tax is completely eliminated, effective July 1, 2012.
Nova Scotia energy efficiency tax credit - A non-refundable tax credit of 25% on eligible capital investments in renewable energy sources or in energy efficiency is introduced effective July 1, 2006. It is limited to 50% of the large corporations capital tax payable in a given year.
Nova Scotia manufacturing and processing investment tax credit - Expenditures incurred after May 9, 2006, are not eligible to be added to the capital cost of qualified property. You will not be able to carry forward an unused credit to a tax year ending after December 31, 2009.
Nova Scotia film industry tax credit - Film productions with more than 50% of production outside of Halifax Regional Municipality will be eligible for the 5% regional bonus on the entire production, effective July 1, 2006.

Prince Edward Island

[2006-03-30 Budget]
Prince Edward Island tax rate - The lower rate of Prince Edward Island income tax will be gradually reduced from 6.5% to 1% over the next five years. It is reduced to 5.4% effective April 1, 2006.

Saskatchewan

[2006-11-20 Proposed Legislation]
Saskatchewan tax rate- The lower rate of Saskatchewan corporate income tax is being reduced from 5% to 4.5%, effective January 1, 2007.
[2006-11-20 Proposed Legislation]
Manufacturing and processing investment tax credit - This credit is being reduced from 7% to 5% for qualified property acquired after October 27, 2006.
[2006-04-06 Budget]
Saskatchewan tax rate - The higher rate of Saskatchewan income tax will be gradually reduced to 12% over the next two years. It is reduced to 14%, effective July 1, 2006.
Saskatchewan small business limit - The business limit to which the lower rate of income tax may be applied will be gradually increased to $500,000 over the next two years. It is increased to $400,000, effective July 1, 2006.
Saskatchewan manufacturing and processing profits tax reduction - The rate of the maximum reduction will be gradually decreased to 2% over the next two years. It is decreased to 4%, effective July 1, 2006.
Saskatchewan manufacturing and processing investment tax credit - This credit is fully refundable on expenditures incurred after April 6, 2006. The carry-forward period of the non-refundable tax credit will be extended to 10 years instead of 7 years, for tax credit not expired by April 6, 2006.
Saskatchewan royalty tax rebate - The Saskatchewan royalty tax rebate will be phased out. Commencing January 1, 2007, the carry‑forward period for any outstanding royalty tax rebate balances will be limited to seven years.
Saskatchewan qualifying environmental trust tax credit - This credit will be affected by the reduction in Saskatchewan higher rate of income tax.

Yukon

[2006-03-30 Budget]
Yukon mineral exploration tax credit - This credit is limited to $300,000 on expenses incurred from April 1, 2006 until the end of the program - March 31, 2007.

What's new for 2005

Accelerated tax reduction - For 2005 and subsequent tax years, the accelerated tax reduction is no longer available. Consequently, any reference to this reduction in the T2 guide has been removed. Line 637, Accelerated tax reduction, has been removed from the T2 corporation return.
Non-resident owned investment corporations - Generally, the last tax year in which a corporation could be a non‑resident‑owned investment corporation (NRO) was a tax year beginning in 2002. As transitional relief, a corporation could elect to be treated as an NRO in its first non‑NRO year to allow it to recover refundable tax on dividends it paid out in its first non‑NRO year. Since a corporation can no longer qualify as an NRO, all references to NROs in the T2 guide have been removed. Line 804, Allowable refund for non resident owned investment corporations, has been removed from the T2 corporation return.
Syncrude Remission Order - The Syncrude Remission Order expired on December 31, 2003. Consequently, the remission under this Order is no longer available for tax years that begin after December 31, 2003. References to this deduction will be removed next year from the T2 guide. Line 815, Royalties deductible under Syncrude Remission Order and Line 816, Tax remitted under Syncrude Remission Order will also be removed next year from the T2 corporation return.

2005 federal, provincial and territorial budgets

The following changes were announced in the 2005 federal and various provincial/territorial budgets or in a subsequent legislative amendment.

Agricultural co-operatives - The deduction in a tax year by an agricultural co-operative corporation for patronage dividends paid in the form of tax deferred co-operative shares issued after 2005 and before 2016 will be restricted to no more than 85% of its income for that year attributable to business done with members.
Capital cost allowance - Capital cost allowance rates will be better aligned with the useful life of assets. As part of this continuing review, CCA rates will be adjusted for hydrocarbon transmission pipelines and related pumping and compression equipment; combustion turbines generating electricity; electricity transmission and distribution equipment; and cables for telecommunications infrastructure.
Corporate surtax - The surtax will be eliminated for small and medium sized corporations for tax years that begin after December 31, 2007.
Scientific research and experimental development (SR&ED) investment tax credit - For purposes of this credit, the expression “in Canada” will include the “exclusive economic zone” of Canada.