Corporations pay income tax on their net profit — revenue minus deductible expenses. In Canada the combined federal-plus-provincial corporate tax rate is roughly 25-30% for most large corporations, with reduced rates for small Canadian-controlled private corporations. The exact rate varies by province and corporation type, but for engineering-economic analysis the convention is to use a flat rate and apply it uniformly to taxable income.
Individuals pay tax under a progressive system (higher rates on higher brackets); corporations pay a flat rate on each dollar of profit.
Tax matters for engineering economics because it directly affects the cash flows the project produces. A project that returns $1M of pre-tax profit returns only (1-t) \times \1Mt = 27%, that's \730k. Comparison methods (PW, AW, IRR) all have to use after-tax cash flows when taxes are material.
The two main mechanisms by which tax affects the cash flow:
(1) Income tax on operating profit. Revenue minus all deductible expenses (operating costs, employee wages, CCA depreciation, interest on loans, etc.) is the taxable income. Multiply by to get tax owed. Subtract that from pre-tax profit to get after-tax cash flow.
A project that generates an annual operating profit of $100k (already net of operating costs) and is allowed $20k of CCA in that year:
- Taxable income: 100{,}000 - 20{,}000 = \80{,}000$.
- Tax: 0.27 \cdot 80{,}000 = \21{,}600$.
- After-tax cash flow: pre-tax profit minus tax = 100{,}000 - 21{,}600 = \78{,}400$.
Note that CCA reduces taxable income (a “tax shield”) but isn’t itself a cash flow — the cash benefit comes from the reduced tax bill, not from the depreciation entry itself.
(2) Adjusting MARR for after-tax economics. Returns are taxed, so the MARR has to be set higher in pre-tax terms to clear a given hurdle in after-tax terms. The relationship is
A 12% pre-tax MARR at a 27% tax rate corresponds to a roughly after-tax MARR. After-tax PW calculations use the after-tax MARR; before-tax PW calculations use the before-tax MARR.
For the specifics of how depreciation interacts with the tax bill, see Capital cost allowance, Undepreciated capital cost, Half-year rule, Capital tax factor, and Capital salvage factor. For the broader project-evaluation framework, see Minimum acceptable rate of return and Present worth method.