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Corporation Taxation

Learn how corporations are taxed in Canada, how business and investment income is treated inside a corporation, and what rules apply to corporate earnings

Getting Started with Corporation Taxation

If you own an incorporated business or hold investments through a corporation, understanding how corporate taxation works is essential. Corporations in Canada are separate legal entities, which means their income is taxed differently than personal income. This guide introduces the basics of how corporate income is taxed, how business earnings are treated, and how investment income is handled within a corporate structure.

How Are Corporations Taxed in Canada?

Corporations must pay tax on their taxable income, which includes business profits and investment income. The corporate tax system operates separately from the personal tax system. In general, corporations file their own tax returns, pay tax on their earnings, and may distribute after-tax profits to shareholders through dividends, which are then taxed again at the personal level.

There are different tax rates for different types of income. Small businesses that qualify for the small business deduction may pay a reduced rate on the first portion of active business income, while other income may be taxed at the general corporate rate.

Why Understanding Corporate Taxation Matters

Incorporating a business can offer several tax advantages, such as income deferral, access to lower tax rates on active business income, and potential opportunities for tax-efficient compensation or succession planning. However, there are also important rules to follow, especially when it comes to investment income held inside the corporation.

Understanding the distinctions between business income and passive investment income helps you make informed decisions, avoid penalties, and take advantage of legitimate planning strategies.

The benefits of understanding corporate taxation

  • Plan more effectively for how and when to draw income from a corporation

  • Reduce taxes through income splitting, deferral, or dividend planning

  • Separate business and investment income for accurate tax reporting

  • Understand how corporate profits are taxed and distributed

  • Avoid unexpected tax consequences related to passive income

Make the Most of Corporate Tax Planning

Corporations provide flexibility and tax planning opportunities, but only if you understand how the rules apply. Whether you are running an active business or holding investments inside a corporate entity, knowing how taxes work helps you protect your profits and manage growth.

Understanding How Corporations Are Taxed

If you run an incorporated business, it’s important to know how different types of income are taxed inside the corporation. This section breaks down the basics so you can report correctly and plan ahead: