The level of taxation in Canada compares favourably with that of other major industrialized countries. Canada has a comprehensive social security system, as well as excellent public health care, training and educational services. Yet, with all of these publicly financed benefits, corporate and business taxes are still competitive with the U.S. and the G-7 average.
Corporations operating in Ontario are generally taxed at a rate of 36.12 per cent. However, Ontario's manufacturing and resource industries are subject to a lower 12.12 per cent provincial tax rate. When combined with the federal Manufacturing & Processing (M&P) rate of 22.12 per cent, a corporation earning manufacturing income in Ontario is taxed at a rate of only 34.12 per cent. By way of comparison, this combined rate is generally less than the combined statutory U.S. federal and state tax rates.
Canadian-controlled private corporations carrying on business in Ontario are also eligible for a much more favourable combined federal/Ontario rate of 18.62 per cent on the first C$250,000 of active business income earned.
Corporate Minimum Tax
Ontario's Corporate Minimum Tax (CMT) applies only to groups of companies with gross revenues in excess of C$10 million, or total assets in excess of C$5 million. Income for CMT purposes is based upon the income reported on the company's financial statements, which must be prepared in accordance with generally accepted accounting principles. Financial statement income is adjusted for a few specific items and taxed at a rate of 4 per cent. If the CMT calculation is higher than the corporation's regular Ontario tax, the excess is payable as CMT. This excess may be carried forward for up to 10 years to offset regular Ontario tax in a year to the extent it exceeds the CMT calculation. Seven states in the U.S. have an alternative minimum tax on corporations that is more complex and onerous than Ontario's CMT.
Large Corporations Tax and Capital Tax
Corporations are also subject to a 0.2 per cent federal large corporations tax (LCT), based upon a corporation's taxable capital in excess of C$10 million. Taxable capital generally comprises the debt and shareholders' equity figures reported on the liability side of a corporation's balance sheet. A corporation's LCT liability can be reduced by the 4 per cent federal surtax included in its federal income tax payable. Therefore, depending upon a corporation's income, the LCT liability can be reduced significantly or eliminated. Ontario also imposes a 0.3 per cent provincial capital tax on taxable capital in excess of C$2.3 million. Ontario's capital tax is currently deductible in computing both federal and Ontario taxable income, so its after-tax cost can be reduced by up to 44 per cent.
Ontario corporations must collect Employment Insurance premiums and Canada Pension Plan (CPP) contributions, from both the employer and the employee, to provide support for loss of employment (including maternity leave) and retirement. The CPP rate is 4.95 per cent of wages for employers and employees, up to a maximum of C$1,910 per employee. For 2006, employees pay Employment Insurance premiums at a rate of 1.87 per cent of wages, ranging up to a maximum of C$729 per employee; while employers pay at a rate of 2.62 per cent of wages up to a maximum of C$1,021 per employee. The comparable rate for U.S. employers and employees for social security taxes is higher, at 7.7 per cent.
Ontario also levies the Employer Health Tax (EHT) to help fund universal health care. The tax rate is 1.95% of payroll expenditures, with the first $400,000 exempt.
Non-Resident Withholding Tax
Interest, dividends, rents and royalties and certain other payments to non-residents are subject to a 25 per cent federal withholding tax, which is generally reduced to 5 to 15 per cent by a tax treaty depending on where the non-resident recipient resides. The federal government, in the course of treaty negotiations and renegotiations being undertaken with some 30 countries around the world, is working to eliminate withholding taxes on arm's length payments in respect of rights to use patented information or information concerning scientific experience and on payments made for the use of computer software. A revised Canada-U.S. Treaty Protocol has recently been enacted. Some of the key elements in the protocol are a reduction in withholding tax rates on interest and dividend income; withholding tax on payments for computer software and royalties for patents and technological information has been eliminated.
Personal Income Tax
Personal income tax rates for Ontario residents are progressive. The combined federal and Ontario rates range up to about 46 per cent, with the top marginal rate applying to taxable incomes over C$100,000. Ontario's income tax rates are among the lowest in Canada at all income levels. A new surtax system, the Fair Share Health Care Levy, has also been implemented in Ontario to offset the reduction in Employer Health Tax outlined above. The first level of surtax will apply at a rate of 20 per cent to Ontario tax in excess of C$4,555, and the second level will apply at a rate of 26 per cent to Ontario tax in excess of C$6,180.
For individual taxpayers, there is an exemption of up to C$500,000 available for capital gains resulting from the disposition of certain "small business corporations" shares and farm properties. Gains on the sale of a taxpayer's principal residence are generally tax-free -- there is no dollar limit -- and this exemption does not affect the lifetime capital gain exemption.
Goods and Services Tax (GST)
The seven per cent federal Goods and Services Tax (GST), is a tax on final consumption applicable throughout the production and distribution chain, like a European value-added tax. Businesses charge GST on domestic sales, but can recover GST they pay on supplies, inventories, assets and services used to do business. Some goods and services are exempt from the GST such as: exports, basic groceries, prescription drugs, medical devices and agricultural and fishery products.
Provincial (Retail) Sales Tax (PST)
The Ontario retail sales tax (PST) of 8 per cent applies to most goods and select services. Significant exemptions include food, children's clothing, and energy, as well as exemptions to production and research and development machinery and equipment.
Land Transfer Tax
Ontario has a land transfer tax of between 0.5 per cent and 2 per cent, depending upon the cost and use of the particular property. For instance, the tax on commercial and industrial property does not exceed 1.5 per cent. Non-residents pay tax on the purchase of all land at the same rate as residents.