Corporate tax in Canada

How corporate tax works

Canada taxes a resident company’s worldwide income. The company normally pays federal income tax plus provincial or territorial income tax on its taxable profit. Paying a salary or dividend to an owner can create a separate personal tax bill.

The Canada Revenue Agency (CRA) administers federal corporate income tax and most provincial corporate income taxes. Alberta and Québec administer their own corporate returns. A non-resident company can still owe Canadian tax on a Canadian business or certain Canadian property, subject to treaty relief.

Is the company tax resident in Canada?

Work through these tests in order. A company can be Canadian tax resident even if it is incorporated abroad or earns all its revenue outside Canada.

1. Incorporated in Canada?

   A corporation incorporated in Canada after 26 April 1965 is generally deemed resident in Canada. Moving its directors abroad does not, by itself, remove that status.

2. Where are the real strategic decisions made?

   A foreign-incorporated company can be resident in Canada if its central management and control is exercised here. This means the people who actually direct the business: approving major investments, financing, budgets and strategy. A foreign registered office or directors who merely sign decisions made in Canada does not settle the issue.

3. Do both countries treat it as resident?

   Apply the actual tax treaty. Corporate tie-breakers vary: some use incorporation or effective management; others require agreement between the tax authorities. If the treaty treats the company as resident only in the other country, Canadian law generally treats it as non-resident.

Federal and provincial corporate income tax

Add the federal rate to the rate for the province or territory where the company has a permanent establishment, such as a business office. If it operates in more than one province, allocation rules divide taxable income; it is not a free choice of the cheapest registered-office address.

These are ordinary active-business rates in effect on 15 October 2026. The lower combined rate assumes the income qualifies for both the federal and provincial small-business reductions. Investment income, personal-services businesses and some industries have different treatment.

Worked example: $600,000 of taxable business profit

Sales taxes: federal and provincial

Businesses collect sales tax on taxable sales and remit it to the tax authority. This is separate from income tax on profit. The rate usually follows place-of-supply rules, often the customer’s province for goods delivered there, rather than where the company was incorporated.

The federal Goods and Services Tax (GST) is 5%. Some provinces combine it with a provincial portion as Harmonized Sales Tax (HST). Others levy a separate Provincial Sales Tax (PST), Manitoba Retail Sales Tax (RST) or Québec Sales Tax (QST).

Withholding tax on payments to non-residents

When a Canadian company pays certain income to a non-resident, it must deduct Canadian tax from the payment and remit it. The percentages below apply to the gross payment. A treaty may reduce the rate, but only when the recipient and payment qualify.

Controlled foreign companies: when overseas income is taxed now

Canada has controlled foreign company rules, generally referred to here as the controlled foreign affiliate rules. They can tax a Canadian resident owner on certain income earned inside an overseas company even when no dividend is paid.

The main inclusion is foreign accrual property income (FAPI): broadly, passive investment income and certain other income defined by law. Genuine active business income is generally treated differently, but the detailed tests can classify some businesses or related-party income as passive.

Holding companies and dividends received

Canada does not give every holding company a blanket exemption for foreign dividends or gains. The result depends on who pays the dividend, the ownership relationship and, for foreign affiliates, the income and taxes recorded in their surplus accounts.

Transfer pricing: transactions within an international group

Related companies cannot choose arbitrary prices to move profit between countries. Canadian rules generally require cross-border transactions with non-arm’s-length parties to reflect the terms independent parties would have agreed. This covers goods, management fees, intellectual-property royalties, loans and guarantees.

For tax years beginning after 4 November 2025, the revised rules examine the actual arrangement and conduct, including the parties’ functions, assets and risks. They can adjust the transaction itself where independent parties would have arranged things differently.

Thin capitalisation and other interest limits

Interest must first satisfy the ordinary deduction rules. Related-party funding also needs supportable pricing. Two additional restrictions can then apply; passing one does not mean the other is satisfied.

General anti-avoidance rule

The general anti-avoidance rule (GAAR) can deny a tax benefit from an avoidance transaction that misuses a tax provision or abuses the legislation read as a whole. Following the literal wording of individual rules is not enough if the overall arrangement defeats their purpose.

Under the revised rule, obtaining a tax benefit need only be one of the main purposes of the transaction. A significant lack of economic substance is an important indicator of misuse or abuse. Ordinary tax planning is not automatically abusive.

Canada’s tax treaty partners

A treaty can limit source-country tax, resolve residence conflicts and provide double-tax relief. It does not make all foreign income exempt. Check the income article, recipient eligibility, protocols and any changes made by the Multilateral Instrument, the agreement that modifies participating tax treaties.

Tax year, returns and payments

If the company leaves Canada

A company becoming non-resident can face a deemed year-end, deemed disposals of assets at market value and an additional corporate emigration tax. The shareholder moving abroad does not automatically move the company; first apply the corporate-residence tests above.

A company that remains resident generally continues reporting worldwide income. A non-resident company may still have Canadian business, property, withholding and filing obligations. Losses and foreign-tax relief have their own limits and supporting schedules.