DEFINITION of Capital Tax
Capital tax is a tax on a corporation's taxable capital, comprising of capital stock, surpluses, indebtedness, and reserves. Capital tax is applicable to capital 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).
BREAKING DOWN Capital Tax
Capital tax is a wealth tax imposed on the capital of large corporations in certain provinces in Canada. The tax is based on the amount of capital employed (essentially debt and equity), regardless of profitability. 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. Although this tax was eliminated on January 1, 2006 at the federal level, financial and insurance corporations with taxable capital in excess of $1 billion are still levied a 1.25% capital tax, as of 2018. The capital tax payable can be reduced by the amount of income tax it 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 and 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.
Some provinces also charge the corporate capital tax. These provinces, as of 2018, include Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, and Saskatchewan. The provincial capital tax cannot be reduced by any 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 (> $1.5 billion), and 0.7% for small financial institutions (≤ $1.5 billion).