The small business tax rate applies on the first $500,000 of active income that is earned by a qualifying small business corporation. The tax rate on this income in British Columbia will be reduced to 11%. This drop will represent the final annual decrease in the plan that was introduced by the federal government in 2016. For active business income over $500,000, the tax rate will remain unchanged at 27%.
To offset the decrease in corporate tax rates, the CRA has increased the personal tax rate on dividends paid to shareholders on the qualifying earnings of these corporations. As a result, the net after tax cash of a shareholder has dropped across all income levels on the receipt of dividends. Shareholders in many cases will now pay less cumulative taxes on wages as compared to dividends.
There have been discussions concerning the Canadian response to the drop in corporate income tax rates in the United States. Their federal corporate tax rate dropped from 35% to 21%. When combined with corporate tax rates charged by individual states, the average tax rate for companies in the United States is just under 26%.
Additional drops in corporate tax appear unlikely in Canada. However, the federal government may increase the rates with which capital purchases can be written off, which formed part of the tax cuts in the United States.