What Is Capital Tax? Definition & Meaning

KEY TAKEAWAYS

• A capital tax is a tax that is imposed on financial corporations in Canada.
• It is essentially a wealth tax, rather than an income tax.
• Any capital taxes that are paid on a provincial level are deductible. This is for federal income tax purposes.

What Is a Capital Tax?

A capital tax is a tax that is levied on a corporation. The tax is based on the corporation’s assets rather than its taxable income. Canada was one of the few nations in the Organization for Economic Co-operation and Development (OECD) that levied both a provincial capital tax as well as a federal tax. 

In 2006, Canada limited its federal capital tax to financial corporations. And some provinces situated within Canada also collect a capital that is specific to financial institutions. 

The capital tax in Canada calculates a corporation’s total capital as:

• The total shareholder’s equity
• It’s long-term debt
• The retained earnings
• Any further surpluses

A corporation can deduct some of its investments in other corporations from its taxable Canadian capital. Any financial institution that has taxable capital employed in Canada that exceeds $10,000,000 is required to file a capital tax form (schedule 34). Although only financial institutions that have a capital employed that exceeds $1 billion need to pay the federal capital tax. 

Capital tax is also commonly known as corporation capital tax (CCT). 

How Is Capital Tax Calculated?

Capital tax is calculated according to the capital gains tax rate. 

In Canada, 50% of the value of any capital gains is subject to tax. If you sell the investments at a higher price than you initially paid, you need to add 50% of the capital gain to your income. This is known as realized capital gain. 

This essentially means that the amount of additional tax you pay will vary. This depends on how much the company is making and what other sources of income it has. 

In order to calculate capital tax, you need to figure out the adjusted cost base. This can be done with the following formula:

Once this has been calculated, you can use the following formula to calculate the amount of taxable capital:

Example of Capital Tax

Let’s say that Company X bought 100 shares of Company Y. The total cost was $500 and they paid a $25 commission fee. The adjusted cost base (ACB) would therefore be $525.

Now let’s say that Company X bought 200 shares, but the share price has increased. The total cost is now $1,400 with a $25 commission. The adjusted cost base is now $1,425.

To figure out the ACB per share we can use the above formula:

ACB = $525 + $1,425 = $1,950

Now to find out the individual ACB per share, you need to divide this by the number of shares owned:

ACB per share = $1,950 / 300 = $6.50

Now let’s say that Company X decides to sell 200 shares of Company Y. Company X decides to sell these shares when they reach a sale price of $20 per share in the stock market. There is a $50 brokerage fee that comes with this. With this information, we can find out the market price:

200 shares x $20 sale price = $4,000 – $50 = $3950

To find out if the company has experience a capital gain, or capital losses, we just use the information we now have: 

200 shares x $6.50 ACB per share = $1,300

$3,950 – $1,300 = $2,650

So there is capital in excess of $2,650. This is the taxable basis of capital gain you’ll need to pay tax on. Since the rate in Canada is 50%, the capital tax payable is $1,350.

Summary

Capital tax is a wealth tax levied on financial corporations. Canada has a corporate capital tax rate of 50%, meaning any capital gain that goes past the threshold is halved due to the tax.