How is income tax calculated for small business (personal and corporate)?
Personal taxes
The Canadian tax system works with a progressive tax rate system — meaning the more you earn, the higher the rate that is applied. All the various forms of income you earn are pooled to become your total income.
Each "pocket" has a different rate. You can only fit so much income in one pocket. The higher rates only apply to income in that specific pocket, not to all your income.
There are also various deductions and credits to help reduce your taxable income (i.e. medical, charitable, child care, etc.).
Watch this video on how our tax system works. It is a great short watch!
Corporate taxes
There is a lower tax rate (11% as of 2020) that applies to all businesses that earn under $500,000 in taxable income. Income over the business limit as well as passive or investment income have a complicated set of rules that go beyond the scope of this article.
To learn more about the corporate tax rates, visit the CRA or speak to an accountant today!