Everything you need to know about Canadian tax rates

In Canada, understanding corporate tax obligations can be a real challenge. You must navigate through a multitude of federal tax schedules. Each has its own rules and thresholds, depending on the type of business you operate, the nature of your income, and the taxable profit you report. Add to that the quirks of the various provincial and territorial systems, and you've got a real headache on your hands!

This article aims to demystify business taxation in Canada and give you a clear and concise overview of tax rates in 2023, whether at the federal or provincial level.

The federal income tax schedule

At the federal level, there are several different corporate tax schedules, each with its own rates and thresholds:

• Ordinary Business: This system applies to corporations carrying on an active business in Canada.
• Canadian-controlled private corporations (CCPCs): This system generally offers lower tax rates than the ordinary business system, but is subject to certain conditions.
• Investment Income: Corporations may also be taxed on their investment income, such as dividends and interest, at a different rate than their business income.

The basic federal tax rate for corporations in Canada is 38%. This rate can be significantly reduced through strategic tax mechanisms such as the tax exemption and the general tax reduction (GTR) or the SDB (depending on the tax bracket).

Federal tax reduction

The federal tax reduction is a measure designed to harmonize the collection of taxes between different levels of government and to strengthen the competitiveness of the Canadian tax system.

Its application reduces the Part I federal tax rate payable on income earned in Canada by 10%, reducing the overall tax rate from 38% to 28%.

This reduction is available to all corporations earning income in Canada (not applicable to income earned outside of Canada).

General Tax Reduction (GTR)

Introduced in 2017 to stimulate the economy, the General Rate Reduction (GTR) reduces the federal tax rate on income earned in Canada by 13%, from 28% to 15%.

This reduction is designed to help businesses with annual taxable income in excess of $500,000. It does not apply if your company qualifies for SBD, the Canadian Small Business Deduction.

It also does not apply to income from a personal services business or to businesses that are in operation throughout the year. This includes investment companies, mortgage investment companies and mutual fund companies.

Small Business Deduction (SBD)

The SBD is a tax reduction specifically designed to assist Canadian small businesses. It is available at both the federal and provincial levels, which means that if your business qualifies at both levels, the reduction can be added together.

At the federal level, the application of the SBD reduces the tax rate to 9% on the first $500,000 of active taxable income generated during the taxation year (except in Saskatchewan, where the limit is $600,000). At the provincial level, the application of the SBD depends on the province in which your company is incorporated. In Quebec, for example, the rate may be 8.3% on the first $500,000 of taxable income, rather than the higher 11.5% rate indicated on the Revenu Québec's SBD rates page.

This tax initiative encourages small and medium-sized enterprises (SMEs) to invest more in their operations and contribute to the economy. 

Provincial Tax Rates

Canada's corporate tax landscape is diverse, reflecting the wealth and autonomy of each province. In addition to federal tax rates, each province and territory applies its own tax rules and schedules, which can result in significant differences in a company's overall tax rate.

Tax Rates in Quebec

Quebec, with its distinctive tax system, applies a reduced rate for SMEs and a competitive general rate, in addition to various provincial tax credits.

• Reduced rate: 3.2% on the first $500,000 of taxable income to support small businesses.
• General rate: 11.5% on income over $500,000.
• Tax credit: Available to businesses with taxable income up to $500,000.

Ontario Rates

Ontario offers a reduced rate for small businesses and a general rate for higher incomes, with specific tax incentives to stimulate the provincial economy.

• Reduced rate: 3.2% on the first $500,000 of taxable income to support small businesses.
• General rate: 11.5% on income over $500,000.
• Tax credit: Available to businesses with taxable income up to $500,000.

Rates in British Columbia

This province offers a preferential rate for SMEs and a general rate for large corporations, encouraging investment in various sectors.

• Reduced rate: 2% on the first $500,000 to encourage small business initiatives.
• General rate: 12% for higher incomes, targeting larger companies.
• Tax credit: Available to corporations with taxable income under $500,000.

Alberta Tax Rates

Alberta is known for its single tax rate, one of the lowest in Canada, which applies to all businesses and promotes an attractive business environment.

• Single rate: 8%, one of the lowest in the country, applied uniformly to all taxable income, reflecting an attractive tax policy for all businesses.

Rates in Manitoba and Saskatchewan

In Manitoba and Saskatchewan, the corporate tax rate is structured to benefit small businesses and stimulate local economies.

• Single rate: 12%, applicable to all taxable income regardless of threshold.
• Tax Credit: There is no Small Business Tax Credit (SBTC) in this province. This simplifies the tax structure, but limits incentives for small businesses.

Maritime Rates (Nova Scotia, Prince Edward Island, New Brunswick and Newfoundland & Labrador)

These provinces have a similar structure.

• Reduced rate: 3%, applied to the first $500,000, providing an advantage to small businesses.General rate: variable (12% to 16%), suitable for medium to large companies.
• Tax credit: The ITCE is available in these provinces, providing financial assistance to small businesses.

Rates in the Northwest Territories

These territories generally offer a single tax rate, lower than most provinces, to encourage investment and economic development.

• Single rate: 4%, a very competitive rate for businesses of all sizes.
• Tax credit: The absence of an EITC indicates a simplified but less targeted approach to supporting small businesses.

How do you calculate your tax liability? 

In Canada, calculating your company's tax liability involves a number of important steps to ensure that you pay the correct amount and avoid late or incorrect penalties, while maximizing your tax benefits. 

These steps will help you better understand the process of calculating your tax liability. Of course, advance tax planning and an annual review of federal and provincial tax specifics can help you reduce your overall tax rate.

At T2inc.ca, we recommend that you consult with a tax professional to ensure that all calculations are correct and that you are maximizing your tax benefits. Our online business tax solution is ideal for fast, reliable service at a great price!

1. Determine your Taxable Income

The first step is to determine your taxable income. This includes all the income your business earns during the tax year, less any eligible expenses. Qualifying expenses can include operating costs, salaries, marketing expenses, and more. 

Be sure to keep accurate records of all income and expenses to facilitate this calculation.

2. Apply the federal tax deduction

Once you've determined your taxable income, the next step is to claim the federal tax deduction. In Canada, the federal tax credit reduces the basic federal tax rate on income earned in Canada from 38% to 28%. This reduction reflects the federal government's desire to share tax authority with the provinces and territories.

3. Applying the GTR

The General Tax Reduction (GTR) further reduces your federal tax rate. The GTR reduces the rate from 28% to 15% for most businesses, making the Canadian tax system more attractive to investors and more competitive internationally.

4. Apply Provincial Tax Rates

Each province and territory in Canada has its own corporate tax rate that must be applied in addition to the federal tax rate. These rates vary widely from region to region, so it's important to know the applicable rate in your province or territory of residence.

5. Deduct Available Tax Credits

Finally, deduct any tax credits and deductions available to your business. Tax credits can result from a variety of initiatives, such as investing in research and development, employing certain categories of workers, or engaging in environmentally friendly activities. These credits can significantly reduce your tax liability.

For example

Assume your company has taxable income of $100,000 and is located in Ontario.

Federal tax before rebate: $38,000 (38% x $100,000)

Tax credit: $3,800 (10% x $38,000)

Federal tax after rebate: $34,200

GRIP: $4,466 (13% x $34,200)

Net Federal Tax: $29,734

Provincial tax: $11,500 (11.5% x $100,000)

Total tax payable: $41,234

Trust T2inc.ca for your business taxes 

Understanding tax rates and deductions is critical to optimizing your company's tax situation. With this article, we hope you'll gain a better understanding of how federal and provincial corporate tax rates work so you can make the best decisions for your business.

Please consult the resources available on our website to learn more about Canadian business tax accounting. For professional assistance or to take advantage of our corporate tax filing solution, contact our tax accountants today.