What Is Capital Tax?
Canada eliminated its capital tax for most corporations in 2006, but some provinces of Canada still have one. The capital tax is a corporate tax on stock, surpluses, indebtedness, and reserves.
- A capital tax is a wealth tax, not an income tax.
- Some Canadian provinces levy a capital tax on corporations.
- The federal government in Canada has eliminated its capital tax except for large financial institutions.
Capital tax is applicable to the wealth owned by a company, not its spending. In contrast to income taxes, capital taxes are charged regardless of the profitability of the firm.
Capital tax is also called corporation capital tax (CCT).
Understanding Capital Tax
Prior to 2007, the federal government imposed a capital tax on the taxable capital employed in Canada in excess of $50 million of any corporation that was resident in Canada or any non-resident corporation that carried on business in Canada through a permanent establishment.
Provinces that levy a capital tax include Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, and Saskatchewan.
This tax was mostly eliminated at the federal level on Jan. 1, 2006, although financial and insurance corporations with taxable capital in excess of $1 billion are still levied a 1.25% capital tax. This capital tax payable can be reduced by the amount of income tax the corporation pays. Any unused federal income tax liability can be applied to reduce the capital tax for the previous three years and the next seven years.
For tax purposes, the Financial Corporation Capital Tax Act defines a financial corporation as a bank, trust company, credit union, loan corporation, or life insurance company and includes an agent, assignee, trustee, liquidator, receiver, or official having possession or control of any part of the property of the bank, trust company, or loan company but does not include a trust company or loan company incorporated without share capital.
Capital Taxes in the Provinces
Some provinces charge the corporate capital tax. These provinces include Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, and Saskatchewan.
The provincial capital tax cannot be reduced by tax credits. However, the capital tax payable can be deducted when calculating the corporation’s income tax liability.
In Newfoundland and Labrador, for example, the capital tax is 6% of the amount by which the corporation's taxable capital employed in the province for the year, exceeds its capital deduction for the year. A capital deduction of $5 million is available to a corporation with capital of $10 million or less.
Prince Edward Island has a capital tax rate of 5% of paid-up capital in excess of $2 million, and Nova Scotia has a 4% rate up to a maximum capital tax payable of $12 million annually. In Saskatchewan, the capital tax rate is 4% of all taxable paid-up capital for large financial institutions and 0.7% for small financial institutions. Large institutions are defined as having assets over $1.5 billion.