2.4 Tax and Depreciation
In this section, we will explore the topics of income tax and depreciation. They both play important roles in financial decision making and reporting, and it is important to understand how the two are calculated and how they are related to a company’s performance.
2.4.1 Income Tax
Income tax is the amount of money remitted to the government, which is usually a percentage of a company’s income. This percentage is called the tax rate and is set by the government.
In Canada, companies are taxed on the federal and provincial levels. Tax rates depend on company’s income.
- On the federal level, there are two tax rates: the general tax rate, 15%, and small business tax rate, which is 10.5%. The small business tax rate is applicable when a company’s income is less than $500,000, which is also referred to as the business limit. That is, if a company generated income lower than the $500,000 income threshold, then the company has to remit 10.5% of it’s income in taxes. If more than $500,000 was generated in income for the tax year, then the company will have t remit 15% of its income to the government.
- On the provincial or territorial level, the two tax rates are – a lower rate and a higher rate. The lower rate applies to small business with income less than $500,000. The higher rate applies to all other businesses. For example, in Saskatoon, small business has to remit 2% of its income in taxes, while businesses that earned more than $500,000 have to pay 12%.
Note that these tax rates are for 2017 and may be changed by the government for subsequent years.
The tax is calculated on the income tax return, which is based on the information from financial statements and is submitted to the government on the yearly basis. In Canada, income taxes are paid by corporations. A corporation is a business owned by one or more owners. The owners are known as shareholders. A shareholder owns shares of the corporation. Shares are units of ownership in a corporation. For example, if a corporation has 1,000 shares, there may be three shareholders who own 700 shares, 200 shares, and 100 shares respectively. The number of shares held by a shareholder represents how much of the corporation they own. The first shareholder who owns 700 shares owns 70% of the corporation (700/1,000 = 70%).
Note that proprietorships and partnerships are not taxed the same way as corporations are. A proprietorship is a business owned by one person. It is not a separate legal entity, which means that the business and the owner are considered to be the same. For example, the profits of a proprietorship are reported on the owner’s personal income tax return, so they are taxed as income of the person using tax rates determined for personal income taxes. A partnership is a business owned by two or more individuals. Like the proprietorship, it is not a separate legal entity and the partners need to report their respective profits on their personal income tax return. Unlike the