What is a Capital Tax?
A capital tax is a tax levied on a corporation that is based on its assets rather than its income. Canada was one of the few OECD nations that levied both a federal and provincial capital tax. Canada limited its federal capital tax to financial corporations in 2006, and some provinces of Canada also collect a capital specific to financial institutions.
Canada's capital tax calculates a corporation's total capital as the total shareholder's equity, its long term debt, retained earnings, and any other surpluses. A corporation can deduct some investments in other corporations from its taxable Canadian capital. Financial institutions with taxable capital employed in Canada exceeding $10 million are required to file a capital tax form (Schedule 34), although only financial institutions with capital employed exceeding $1 billion pay the federal capital tax.
Capital tax is also called corporation capital tax (CCT).
Understanding Capital Taxes
A capital tax is a basically a wealth tax imposed on financial corporations in in Canada. The tax is based on the amount of capital employed (essentially debt and equity), regardless of profitability.
- A capital tax is a wealth tax, not an income tax.
- The federal capital tax in Canada now only applies to financial corporations, and the same is true of the provincial level capital taxes.
- Capital taxes paid on a provincial level are deductible for federal income tax purposes.
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. This tax was mostly eliminated at the federal level on Jan. 1, 2006.
However, 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.
Provinces that levy a capital tax include Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, and Saskatchewan.
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 Canadian provinces also charge the corporate capital tax on banks, trust and loan corporations. The rates are set by the provinces, as of 2020, are:
- Manitoba - 6%
- New Brunswick - 5% for banks, 4% for other financial institutions
- Newfoundland and Labrador - 6%
- Nova Scotia - 4%
- Prince Edward Island - 5%
- Saskatchewan - 4%
The provinces that levy a capital tax have different thresholds for taxation that are published on provincial websites. Alberta, British Columbia, Ontario, Quebec, and the territories do not levy a capital tax.