What is the Difference Between Corporate Tax and Personal Tax in Toronto?

January 20, 2022 | Written by: Sohail Afzal

Personal Tax in Toronto

Most people get confused as to what is corporate tax and what is personal tax. This is especially true for business owners and entrepreneurs who might not have a clear demarcation line between the two. For them, it is hard to separate them. If they are using a company vehicle for personal use, does that fall under corporate tax or personal tax in Toronto? In this article, we will explain this enigma and help you navigate through it. Basically, personal tax is the type of tax that the Canadian government imposes on your individual income like wages and salaries. On the other hand, corporate tax is the expense that a business incurs. They are both levied by the government. Businesses pay direct tax on their earnings. The money that the Canadian government collects in lieu of corporate tax is used to finance various projects that directly and indirectly benefit us. 

Let’s dive a little deeper into the subject matter. 

What is Corporate Tax?

Company tax is a form of direct tax that is imposed by the government on the income or capital of companies. There are many variations in corporate tax rules from country to country, which makes it a difficult aspect of a country’s tax system. Many countries, including Curacao, Fiji, Cyprus, etc., are considered tax havens because of their low-tax policies. Net income (net profit) is calculated by subtracting the income before taxes a company has earned in a given period from the earnings before taxes.

Corporate tax rates are capped at 35%.

What Does Corporate Tax Apply To?

The following institutions are subject to corporate taxes:

  • Small, medium, and large corporations all originated in the country
  • Companies operating in the country
  • Permanent establishments of foreign enterprises in the country
  • Companies resident for tax purposes within the country

What is Personal Income Tax?

Governments tax individuals’ incomes through personal income taxes. A worker’s salary and wages are subject to income tax.

Due to tax exemptions, deductions, and credits, most individuals do not pay individual income tax on the full amount of their income. CRA offers various benefits to its citizens, e.g., reimbursements for medical expenses and educational costs, which taxpayers can utilize to reduce their taxable income.

For example, let’s say that a person earns $200,000 and is eligible for $30,000 in tax deductions. In such a scenario, the taxable income will be reduced by $30,000 to $170,000 ($200,000-$30000).

Tax credits are used to reduce a taxpayer’s tax obligation or owed amount. An individual with income taxes of $30,000 qualifies for only $5,000 in tax credits. In essence, their tax obligation will be reduced from $30,000 to $25,000 ($30,000 – $5,000).

Various laws and government systems affect the rates of personal income taxes in different countries. Nevertheless, most countries use a so-called progressive income tax system, which means those with higher incomes are taxed at a higher rate.

What Does Personal Income Tax Apply To?

Taxes on personal income are imposed on the following entities:

  • Self-employed individuals
  • Employees who work full-time

Final Thoughts

Whether you are a business owner, self-employed or a salaried person, you will have to pay one of the two types of taxes in Toronto. If you are still on the fence, you can contact a professional and experienced accounting firm in Toronto. The accountants in the firm will help you out with your taxes and tax returns and make sure that you file them without any mistakes and on time.

Sohail Afzal CPA Toronto

Sohail Afzal, CPA, CMA, MBA

Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.

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