44 What is the General tax rate and the General rate reduction?
Jerred Flynn
What is the Basic Corporate Rate?
The Basic Corporate Rate is the base tax rate that applies to businesses in Canada. This is a permanent rate, which is then altered by other devices: the Small Business Deduction, the Additional Refundable Tax, and the General Rate Reduction to get your overall corporate tax rate for each type of income. The Basic Corporate Rate is 38%, as of 2022 (ITA 123. (1)(a)).
What is the General Rate Reduction?
The General Rate Reduction (GRR) is applied to Active Business Income not eligible for either the Small Business Deduction or the Additional Refundable Tax. At its core, it is designed to incentivize businesses to focus on generating Active Business Income rather than Investment Income, since the GRR does not apply to Aggregate Investment Income.
How Does It Work?
In short, income that is neither Aggregate Investment Income (which has the Additional Refundable Tax applied to it) nor claimed under the SBD is eligible for the GRR. As of 2022, the GRR is a 13% reduction of the Basic Corporate Rate (ITA 123.4). This is a number that is subject to change periodically, to increase or decrease the income tax that corporations pay.
For example, a new board game design and development company, Game Heretics Designs, has Taxable Income of $50,000. Contained in that Taxable Income is $7,500 of investment income. Additionally, only $20,000 of the income earned is eligible for the Small Business Deduction, as their associated manufacturing company claimed most of the Business Limit. With these conditions, their tax formula would look like the following (assuming all their income was earned in Canada):
| Passive Investment Income | Active Business Income eligible for SBD | Active Business Income Ineligible for SBD | Total Tax Owing | |
| Basic Tax Rate | 38% * $7,500 | 38% * $20,000 | 38% * $22,500 | $19,000 |
| Provincial Abatement | (10%) * $7,500 | (10%) * $20,000 | (10%) * $22,500 | ($5,000) |
| SBD | N/A | (19%) * $20,000 | N/A | ($3,800) |
| ART | 10.7% * $7,500 | N/A | N/A | $802.50 |
| GRR | N/A | N/A | (13%) * $22,500 | ($2,925) |
| Effective Tax Rate/Tax Owing |
38.7% * $7,500 =$2,902.50 |
9% * $20,000 =$1,800 |
15% * $22,500 =$3,375 |
$2,902.50
+1,800 +3,375 $8,077.50 |
As this example illustrates, the ability of the government to adjust the functional tax rate by adjusting the General Rate Reduction is much more effective than adjusting the Basic Tax Rate, since doing so would require them to adjust the Small Business Deduction, Provincial Abatements, Additional Refundable Tax, and the General Rate Reduction to ensure that the preference given to Active Business Income earned in Canada remains intact. This is also important for public corporations, as their entire income earned in Canada is taxed at the same functional rate as a CCPC’s active business income which is ineligible for SBD (i.e. the 15% GRR rate as of 2022).
Note that as the M&P deduction rate (13%) is the same as the GRR (13%) we typically don’t worry about the M&P rate in this course as the tax payable amount would be the same under either method.
Interactive content (Author: David Ren, January 2020)
References: ITA 123.4(1) “General Rate Reduction Percentage”, 123.4(2)
January 2020
