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 nations that levied both federal and provincial capital taxes. Canada limited its federal capital tax to financial corporations in 2006, and some provinces in Canada also levy equity capital from financial institutions.

Canada’s capital tax calculates a corporation’s total capital as its total equity, long-term debt, retained earnings, and any other excess. A corporation may deduct certain investments in other corporations from its taxable Canadian capital. Financial institutions with taxable persons capital employed in Canada exceeding $10 million must file a capital tax form (schedule 34),although only financial institutions with more than $1 billion in capital employed pay the federal capital tax.

Capital tax is also called corporate capital tax (ICC).

Understanding Capital Taxes

A capital tax is essentially a wealth tax imposed on financial companies 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 and not an income tax.
  • 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 taxable capital employed in Canada in excess of $50 million of any corporation resident in Canada or any non-resident corporation that carried on business in Canada through an establishment steady. This tax was largely eliminated at the federal level on January 1, 2006.

However, financial and insurance companies with taxable capital in excess of $1 billion are still subject to a capital tax of 1.25%. This capital tax liability can be reduced by the amount of income tax the corporation pays. Any unused federal income tax liability can be used to reduce the capital tax for the previous three years and the following seven years.

The provinces that levy a capital tax are Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island and Saskatchewan.

For tax purposes, the Financial Corporations Capital Tax Act defines a financial corporation as a bank, trust company, boxa loan company or a life insurance company and includes an agent, assignee, trustee, liquidator, receiver or official having possession or control of any part of the property of the bank, company trust or loan company, but does not include a trust company or loan company incorporated without shares the capital.

Provincial capital taxes

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.

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