What is Corporation Tax?
We have often come across the word corporation tax. But most of us might not know what it refers to.
This article aims to present as clearly as possible various types of corporate tax and how it works. This will make an ordinary person understand the concept of Corporation Tax.
Corporation tax or corporate tax as it is sometimes referred to as is a tax that is levied by various jurisdictions on the profits which are made by companies or corporations or organizations. In simpler terms, it is the tax that a company needs to pay on the profits it makes.
Since Corporate Tax is imposed on Corporations, it is essential that Corporation be defined in this article.
What is a Corporation?
A corporation is a juridical entity, vested with juridical personality under a particular jurisdiction in which it is registered and operating. It could be a non-profit organization, tax exempt corporation, inactive corporation, charitable institution among others. In Canada, a corporation may either be organized either under federal or provincial law. The tax system on a corporation depends on how it was organized; a charitable institution for example is exempt from corporate tax.
The aim of any company or organization is to create surplus that is to make profit. As the corporation tax is levied on this excess or profit, it is of great significance. This is the reason why so much importance is given to corporate or corporation tax.
How Corporate Tax is Calculated?
The way this tax is calculated varies from country to country. Every country has its own set of rules based on which this corporation tax is calculated. Canada is no exception to this. The corporation taxes are calculated based on a set of rules which has been laid down by the Government of Canada.
Corporate tax in Canada includes the taxes which are levied on corporate income as well as other taxes which are paid by various organizations or corporations to various levels of the government of Canada. These include insurance premium taxes, payroll levies, sales and excise tax, capital tax, property tax, etc.
A new law which took effect January 1, 2011 stated that the corporate income tax rate fall from 18% (on 2010) to 16.5% (2011), and another reduction of this rate is expected in this year (2012) of about 15%.
Tax problems of shareholders of a Corporation
There are certain problems which arise in the case of a company. The shareholders of a company might be taxed based on the profits they get from the company. This will be after the company has already paid the tax for the profit declared. Different countries approach this problem in different ways. In Canada, what they do is the dividends
which are taxable in the hands of any shareholder who is eligible can qualify for a dividend tax credit. This dividend tax credit is nothing but a compensation for the taxes which have already been paid by the corporation as corporation tax to the Government of Canada.
When one looks at the tax rates, it should not be surprising to note that there is no specific tax rate that has been adopted by countries around the world. Every country has its own tax rate which is based on some calculations applicable to that particular country. When we look at the tax rated in Canada, it is further complicated as there are sub national governments which also collects taxes from corporations.
Income tax is the one of the biggest source of revenue for the Government of Canada. When one refers to the word income tax, it is important to understand that in encompasses both personal tax as well as corporation tax. Usually, in Canada, it is the personal tax which gets more revenue to the government than the corporation tax. Sometimes, the revenue generated by the personal taxes is up to three times the revenue that is generated by corporation taxes.