Corporate Taxes Glossary
A reference guide to corporate tax terms used in Mesa CPA's helpdesk articles.
Active Business Income (ABI)
Income earned from the active operation of a business — as opposed to passive investment income. The Small Business Deduction applies to ABI, not to passive income like interest, rent (passive), or dividends from other corporations.
Adjusted Cost Base (ACB)
The cost of an asset for tax purposes, including the original purchase price and any subsequent adjustments. Used to calculate capital gains when the asset is sold.
Capital Gain
The profit on the sale of a capital property (shares, real estate, business assets). Currently, 50% of capital gains are included in income (the "inclusion rate"). The remaining 50% is tax-free. This inclusion rate may be subject to future changes — confirm with your Mesa CPA advisor.
CCPC (Canadian-Controlled Private Corporation)
A private corporation incorporated in Canada and controlled by Canadian residents (not by non-residents or public companies). CCPCs are eligible for the Small Business Deduction and other favourable tax treatment.
CRA Notice of Assessment (NOA)
The CRA's official response to your filed tax return. Confirms the amounts assessed, any adjustments made, and the balance owing or refunded. Review it carefully when received and flag any discrepancies to your Mesa CPA advisor.
Dividend Refund
A mechanism for CCPCs with passive investment income. When dividends are paid to shareholders, the corporation receives a partial refund of the additional tax paid on passive income. Tracked through the RDTOH account.
Fiscal Year-End
The date a corporation's accounting year closes. Can be any month-end, chosen when the corporation is first registered. Determines all tax filing and payment deadlines.
Instalment
A periodic prepayment of corporate income tax made throughout the tax year. Required when annual tax owing exceeds $3,000. Paid monthly, due on the last day of each month.
Lifetime Capital Gains Exemption (LCGE)
A federal tax exemption available to individual shareholders on the sale of qualifying small business corporation shares, qualifying farm property, or qualifying fishing property. The 2024 lifetime limit is approximately $1.25M. One of the most significant tax planning opportunities for Canadian business owners.
Net Income for Tax Purposes
The corporation's taxable income before special deductions (like CCA and the SBD). Your accountant calculates this on Schedule 1 of the T2 return, starting from accounting net income and adjusting for non-deductible items.
Passive Income
Income earned from investments held inside a corporation — interest, rent from non-business properties, dividends from other corporations. Taxed at a higher rate than active business income (~50%) with a refundable portion. High passive income can reduce or eliminate the Small Business Deduction.
RDTOH (Refundable Dividend Tax on Hand)
An account that tracks the refundable portion of tax paid on passive investment income. When the corporation pays dividends to shareholders, it receives a refund from RDTOH at a rate of 38.33 cents per dollar of eligible dividends paid.
Small Business Deduction (SBD)
A federal tax reduction that lowers the corporate income tax rate from 15% to 9% on the first $500,000 of active business income earned by a CCPC. Combined with provincial rates, typically results in an effective rate of 9–14% on the first $500K.
SR&ED (Scientific Research and Experimental Development)
A federal tax incentive program for businesses that conduct qualifying research and development in Canada. Provides significant tax credits — up to 35% for CCPCs on eligible expenditures. Must be claimed within 18 months of the fiscal year-end.
T2 Return
The corporate income tax return filed annually with the CRA. Due 6 months after fiscal year-end. Includes financial statements, schedules for income calculation, CCA claims, and various elections.
Tax Loss Carry-Forward / Carry-Back
A mechanism to apply a year's losses against income in other years. Non-capital losses can be carried back 3 years (recovering prior tax paid) or forward 20 years (offsetting future income). Capital losses can only offset capital gains.
Taxable Income
The amount of corporate income subject to tax after all deductions. Calculated on the T2 return: net income for tax purposes minus the Small Business Deduction and other allowable deductions.