What is a capital tax?
A capital tax is a tax levied on a company that is based on its assets rather than its income. Canada was one of the few OECD countries to levy both a federal and provincial capital tax. Canada limited its federal capital tax to financial corporations in 2006,and some provinces in Canada also collect equity capital from financial institutions.
Canada’s capital tax calculates the total capital of a corporation as total equity, long-term debt, retained earnings, and any other surplus. A corporation can deduct certain investments in other corporations from its taxable Canadian capital. Financial institutions whose taxable capital employed in Canada exceeds $ 10 million are required to file a capital tax form (Schedule 34),although only financial institutions with capital employed in excess of $ 1 billion pay federal capital tax.??
The capital tax is also called the corporate capital tax (ICT).
Understanding taxes on capital
A capital tax is essentially a wealth tax imposed on financial corporations in Canada. The tax is based on the amount of capital employed (mainly debt and equity), regardless of profitability.
Key points to remember
- 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 applies to capital taxes at the provincial level.
- Capital taxes paid at the 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 of more than $ 50 million of any corporation that was resident in Canada or any non-resident corporation that carried on business in Canada through of a permanent establishment. This tax was largely abolished at the federal level on January 1, 2006.
However, financial and insurance companies with taxable capital over $ 1 billion are still subject to a capital tax of 1.25%. This capital tax payable can be reduced by the amount of income tax the company pays. Any federal unused income tax can be applied to reduce capital tax for the preceding three years and the following 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 company as a bank, trust company, credit union, loan company or life insurance company and includes a 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 or a loan company incorporated without share capital.
Capital taxes in the provinces
Some Canadian provinces also impose corporate capital tax on banks, trust companies and loan companies. 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%
Provinces that levy capital tax have different tax thresholds which are published on provincial websites. Alberta, British Columbia, Ontario, Quebec and the territories do not levy capital tax.