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Corporate Taxation

Corporate taxation is the taxes imposed by the government on the income or capital of legal entities, in this case, corporations. The tax is usually calculated from the corporations net profits, typically known as income tax.  Other versions of corporation taxation include the taxes imposed on the members of the corporate entities on dividends. 

Usually, the amount of tax a corporation must pay is determined by their corporate structure; this is how the government determines what percentage the corporation will pay.  The tax is actually imposed on the taxable income, which is usually gross income (sales plus other income, minus cost of goods sold and tax exempt income). There are also tax reductions that are available to corporations, that include interest deductions.  It is also common for tax systems to impose income tax on shareholders of corporations when earnings are distributed (a dividend).  Some corporate events are also considered tax deductions.  These include: formation of a corporation by a controlling shareholder, acquisitions and reorganization of legal identity, structure or capitalization.

If a corporation has foreign aspects, they are taxed differently than the domestic branch. The foreign branches are usually taxed within the jurisdiction when they earn their income through a branch or permanent establishment within that jurisdiction.

In Canada and the United States, corporations are taxed under the same framework as individuals are taxed for personal income.  The differences between the taxes here are related to the inherent differences between the individuals or corporations they are taxing.  However, corporations are subject to a lot more categories of taxation, such as payroll tax, excise tax and value added tax, simply because of the nature of their structure.

The actual tax rates vary by jurisdiction.  Some examples are:

  • Canada= Federal 11% or 15%, plus provincial 1% to 16%
  • United States= Federal 15% to 35%, States 0% to 10% (deductible in computing federal taxable income)

The majority of tax systems require that corporations file annual income tax returns.  The returns base taxable income on financial statement profits.  Examples of these forms include the Canadian T-2 tax form and the American Form 1120.