Ontario Tax Rate for Individuals
Under both federal and Ontario legislation, marginal tax rates apply to individuals. For 2012, the combined federal and Ontario top marginal rate for individuals is 46.41% for ordinary income (such as salary and interest), 23.2% for capital gains and approximately 29.54% for eligible dividends.
In the Ontario budget, released March 27, 2012, and passed on April 24, 2012, the Ontario government introduced a DeficitFighting high-income tax bracket for individuals earning more than $500,000. this measure implemented a 2% provincial personal income surtax. A 1% surtax will be effective for the 2012 year and the full 2% surtax rate will be imposed in 2013. it is anticipated that this measure will continue until fiscal year 2017 – 2018, when the Ontario government expects to return Ontario to a budgetary surplus position.
Ontario Tax Rate for Corporations
Unlike the rates of taxation for individuals, corporations are not subject to marginal tax rates but rather a flat tax rate on income. For 2012, the combined federal and Ontario corporate tax rate for a non-Canadian controlled private corporation (a “CCPC”) is 25% for general manufacturing and processing income and 26.5% for general active business income and investment income. On July 1, 2012, the combined federal and Ontario corporate tax rate for general active business income and investment income of a non-CCPC is expected to decrease to 26% and down further to 25% on July 1, 2013, due to reductions in Ontario’s corporate tax rates.
50% of capital gains of individuals and corporations are included in income and taxed at the applicable rate. Generally, individuals who become residents of Canada will be subject to Canadian tax only on the gain that accrues after becoming resident. individuals are entitled to an exemption on capital gains realized upon the disposition of their principal residence.
Reduced rate for CCPCs
CCPCs in Ontario are taxed at the low rate (the so-called “small business deduction”) of 15.5% on active business income not exceeding $500,000 per annum. A CCPC is, generally, a corporation that is a private corporation and a Canadian corporation not controlled by one or more nonresident persons, by a public corporation or by a corporation with a class of shares listed on a designated stock exchange, or by any combination of these provided the corporation does have a class of shares listed on a designated stock exchange. Depending upon the circumstances, a foreign investor may hold up to 50% of the voting shares without disqualifying the corporation from CCPC status.
Ontario scientific research and Experimental Development (sr&ED)
Businesses in Ontario are eligible for tax relief for their research and development expenditures by way of Ontario research and development tax credit (the “ORDTC”). the OrDtC is a 4.5% non-refundable tax credit on eligible expenditures incurred by a corporation in a tax year that ends after December 31, 2008. An OrDtC earned in the tax year can be claimed in the year or carried forward from any of the 20 previous tax years ending after December 31, 2008. the OrDtC can also be carried back to reduce Ontario corporate income tax payable in any of the three previous tax years, but not to a tax year that ends before January 1, 2009.
Dividends, interest, and royalties (including lump-sum payments for the use of property in Canada) and other amounts paid to a non-resident of Canada are subject to a withholding tax of 25%. Canada’s treaties generally reduce this withholding rate. For example, under the Canada-U.S. Treaty (the “U.S. Treaty”), the withholding rate is 5% on dividends paid by a Canadian corporation to a u.s. resident that owns shares carrying at least 10% of the votes of the Canadian corporation. in other cases, the dividend withholding rate is 15%.
Interest paid or credited by a Canadian resident to a nonresident with whom the Canadian resident is dealing at arm’s length is now exempt from withholding tax except for “participating debt interest”. in general terms, “participating debt interest” is interest contingent or dependent on the use of or production from property in Canada or computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion or by reference to dividends paid or payable to shareholders. Non – arm’s length interest is still subject to a 25% withholding tax under the Income Tax Act (Canada) (the “ITA”), which is generally reduced to 10% for payments to persons resident in those countries with which Canada has a bilateral income tax convention. the withholding tax on non-arm’s length interest payments (other than interest similar to “participating debt interest”) has been eliminated under the u.s .treaty.
Many of Canada’s tax treaties, including the u.s. treaty, eliminate withholding tax on royalty payments for certain intellectual property rights, such as patents, as well as payments for information concerning industrial, commercial or scientific experience and computer software.
Thin Capitalization rules
Canada’s “thin capitalization” rules limit the deductibility of interest by a Canadian-resident corporation. Currently, these rules apply where the amount of debt owing to certain nonresidents exceeds a 2-to-1 debt-to-equity ratio. the federal budget announced March 29, 2012, proposes a number of changes to the thin capitalization rules by: (1) reducing the permitted debt-to-equity ratio to 1.5:1; (b) extending these rules to debts of partnerships with a Canadian-resident corporate member; (c) treating disallowed interest expense under the thin capitalization rules as dividends for withholding tax purposes and (d) preventing double taxation when a Canadian-resident corporation borrows from its controlled foreign affiliate.
The Ontario government eliminated the tax on the capital of large corporations. At the federal level, the large corporation tax was completely eliminated beginning in January 2006, although financial institutions continue to be subject to a tax of 1.25% applied to taxable capital over $1 billion employed in Canada. Financial institutions can, however, reduce their federal capital tax payable by the amount of federal income tax payable and, consequently, pay capital taxes only to the extent that they do not have sufficient corporate income tax liability for the previous three years and the next seven years.
Corporate Minimum tax
Ontario imposes a corporate minimum tax (the “CMT”) of 2.7% on corporations which individually or together with associated corporations have annual gross revenues in excess of $100 million or total assets that equal or exceed $50 million. the CMt is payable only if it exceeds regular corporate income tax payable. the 2.7% CMt rate is based on the adjusted net income of the corporation. A CMt loss earned in a tax year ending after March 22, 2007 may be carried forward 20 years.
The itA levies an additional 25% tax on a non-resident corporation carrying on business in Canada through a branch. this tax is imposed on the after-tax Canadian profits of such corporations carrying on business through a branch that are not reinvested in Canada. the branch tax is in lieu of the withholding tax that would be levied were the corporation resident in Canada and paying dividends to non-resident shareholders. the branch tax is reduced under Canada’s tax treaties to the lowest applicable treaty withholding tax rate on dividends. in some treaties, such as the u.s. treaty, there is a cumulative exemption from branch tax on the first $500,000 of branch profits. As discussed earlier, it may be possible for branch’s profits in Canada to avoid being subject to Canadian income tax if the branch does not have a physical place of business in Canada and there is a tax treaty between the company’s home jurisdiction and Canada.
Employer health tax
In Ontario, the health care system is partially funded by way of a graduated payroll tax levied against employers. if an employer’s payroll (defined as total remuneration to employees, including benefits) exceeds $400,000 the Employer health tax rate is 1.95% of total payroll.
Land transfer tax
The province of Ontario charges land transfer tax on the acquisition of an interest in real property. the amount of the tax is based on the value of consideration paid for the interest in real property and buildings. An extra tax may be applicable on existing encumbrances, but only when obtained for nominal or no consideration (except in the conveyance from one spouse to another). the tax is payable on registration of the conveyance in the applicable registry office or, in the case of unregistered dispositions of a beneficial interest in land, within 30 days of the disposition taking place. the City of Toronto imposes a land transfer tax that generally applies in addition to the provincial land transfer tax on the acquisition of an interest in real
property in the City of toronto.