Taxation in Canada
From Wikipedia, the free encyclopedia
The level of Taxation in Canada is about average among Organisation for Economic Co-operation and Development (OECD) countries, but it is higher than the rate in the United States, the country which Canadians usually use for comparison.
Today, approximately 70% of the Canadian government's income comes from taxation, the rest from tariffs, fees, and investments.
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[edit] Income taxes
[edit] Personal income taxes
Both the federal and provincial governments impose income taxes on individuals, and these are the most significant sources of revenue for those levels of government accounting for over 40% of tax revenue. The federal government charges the bulk of income taxes with the provinces charging a somewhat lower percentage. Income taxes throughout Canada taxes are highly progressive with the high income residents paying a significantly higher percentage than the low income residents. Canadian income taxes are still less progressive than those of many nations.
Where income is earned in the form of a capital gain, only half of the gain is included in income for tax purposes; the other half is not taxed.
Federal and provincial income tax rates are shown at [1].
Personal income tax can be deferred in a Registered Retirement Savings Plan, a tax sheltered savings account or mutual fund that is intended to help individuals save for their retirement.
[edit] Corporate taxes
Companies and corporations pay tax on profit income and on capital. These make up a relatively small portion of total tax revenue. Tax is paid on corporate income at the corporate level before it is distributed to individual shareholders as dividends. A tax credit is provided to individuals who receive dividend to reflect the tax paid at the corporate level. This credit does not eliminate double taxation of this income completely, however, resulting in a higher level of tax on dividend income than other types of income. (Where income is earned in the form of a capital gain, only half of the gain is included in come for tax purposes; the other half is not taxed.)
Starting in 2002, several large companies converted into "income trusts" in order to reduce or eliminate their income tax payments, making the trust sector the fastest-growing in Canada as of 2005. Conversions were largely halted on October 31, 2006, when Finance Minister Jim Flaherty announced that new income trusts would be subject to a tax system similar to that of corporations, and that these rules would apply to existing income trusts after 2011.
Subsequent to the October 31st announcement by Flaherty, the TSX Capped Energy Trust Index lost 21.8% in market value and the TSX Capped Income Trust Index lost 17.6% in market value by mid November 2006. In contrast, the TSX Capped REIT Index, which is exempt from the 'Tax Fairness Plan', gained 3.2% in market value. According to the Canadian Association of Income Funds, this translates into a permanent loss in savings of $30 Billion to Canadian Income Trust Investors [2].
Economist Yves Fortin has challenged the reasons for the change in tax regime announced by Flaherty and disputes the Harper government assertion that the Trust structure has lead to lose of tax revenue because of trust conversions in his research paper Income Trusts and Tax Leakage: Is there a problem?.
Analyst Gordon Tait has also raised concerns about the lack of consultation and misconceptions surrounding the change in tax policy on Trusts in The Inconvenient Truth About Trusts
- See also: Income trust
[edit] Sales taxes
The federal government levies a multi-stage sales tax of 6% on goods and services (7% prior to 1 July 2006), that is called the Goods and Services Tax (GST), and, in some provinces, the Harmonized Sales Tax (HST). The GST/HST is similar to a value-added tax. The Conservative Party of Canada's 2006 election platform proposed to reduce the GST to 5% and the HST to 13%.
All provincial governments except Alberta levy sales taxes as well. The provincial sales taxes of Nova Scotia, New Brunswick and Newfoundland and Labrador are harmonized with the GST. That is, a rate of 14% HST (15% prior to 1 July 2006) is charged instead of separate PST and GST. Both Quebec and Prince Edward Island apply provincial sales tax to the sum of price and GST. The territories of Nunavut, Yukon and Northwest Territories do not charge provincial sales tax.
Provincial and federal sales tax rates at the retail level on goods and some services are as follows:
- Alberta:......................0 + 6% = 6%
- British Columbia:..........7% + 6% = 13%
- Manitoba:....................7% + 6% = 13%
- Ontario:.......................8% + 6% = 14%
- Prince Edward Island:..10% + 6% = 16.6% (PST applied to price + GST)
- Quebec:..................... 7.5% + 6% = 13.95% (PST applied to price + GST)
- Saskatchewan:............5% + 6% = 11%
[edit] Property taxes
The municipal level of government is funded largely by property taxes on residential, industrial and commercial properties. These account for about ten percent of total taxation in Canada.
[edit] Excise taxes
Both the federal and provincial governments impose excise taxes on inelastic goods such as cigarettes, gasoline, alcohol, and for vehicle air conditioners. A great bulk of the retail price of cigarettes and alcohol are excise taxes. The vehicle air conditioner tax is currently set at $100 per air conditioning unit. Canada has some of the highest rates of taxes on cigarettes and alcohol in the world. These are sometimes referred to by Canadians as "sin taxes".
[edit] Payroll taxes
Ontario levies a payroll tax on employers, the "Employer Health Tax", of 1.95% of payroll. Eligible employers are exempt on the first $400,000 of payroll. This tax was designed to replace revenues lost when health insurance premiums, which were often paid by employers for their employees, were eliminated in 1989.
Quebec levies a similar tax called the "Health Services Fund". For those who are employees, the amount is paid by employers as part of payroll. For those who are not employees such as pensioners and self-employed individuals, the amount is paid by the taxpayer.
Premiums for the Employment Insurance system and the Canada Pension Plan are paid by employees and employers. Premiums for Workers' Compensation are paid by employers. These premiums account for 12% of government revenues. These premiums are not considered to be taxes because they create entitlements for employees to receive payments from the programs, unlike taxes, which are used to fund government activities. The funds collected by the Canada Pension Plan and by the Employment Insurance are in theory separated from the general fund. It should be noted that Unemployment Insurance was renamed to Employment Insurance to reflect the increased scope of the plan from its original intended purpose.
[edit] Health and Prescription Insurance Tax
Ontario charges a tax on income for the health system. These amounts are collected through the income tax system, and do not determine eligiblity for public health care. The Ontario Health Premium is an additional amount charged on an individual's income tax that ranges from $300 for people with $20,000 of taxable income to $900 for high income earners. Individuals with less than $20,000 in taxable income are exempt.
Quebec also requires residents to obtain prescription insurance. When an individual does not have insurance, they must pay an income-derived premium. As these are income related, they are considered to be a tax on income under the law in Canada.
Other provinces, such as British Columbia and Alberta, charge premiums collected outside of the tax system for the provincial medicare systems. These are usually reduced or eliminated for low-income people.
[edit] Inheritance tax
Since the government of Brian Mulroney in the 1980s, Canada has had no inheritance taxes. Instead, inheritance is treated as a disposal subject to the same capital gains taxation as, for example, the sale of the asset.
[edit] History
When Canada became independent in 1867, the British North America Act attempted to create a centralized federal government with unlimited revenue gathering abilities. The federal government was entrusted with the high cost programs, most notably defence and the building of railways. The provinces were given limited taxation power, they could only impose direct taxes such as sales and income tax. They were given responsibilities that were meant to be cheaper such as health care and education.
For the early part of Canadian history most federal government revenue came from tariffs on trade with excise taxes making up the rest of the government's funding. The largest source of provincial funding was license permits and transfers of funds from the federal government. The first corporate taxes were introduced at the end of the nineteenth century.
This resulted in a crisis during the Great Depression. The provincial governments were responsible for the skyrocketing welfare costs, but they could not raise enough taxes, especially since the taxes permitted the provinces were so dependent on the health of the economy. The federal government still had plenty of money, however. This resulted in the system of transfer payments between the two levels of government that continues to this day.
The First World War had mostly been financed by traditional means, but in 1917, a tax on income was introduced as a temporary measure to fund the war. The income tax has since become a permanent feature of the Canadian tax system. The Second World War led to dramatic change in the tax system. The percentage of Canadian government revenue from indirect taxes fell from 90% in 1913 to less than 40% by 1946. Instead, Canadians began to pay income taxes and direct taxes has since provided the greatest bulk of government funding.
[edit] International taxation
Canadian individuals and corporations pay income taxes based on their world-wide income. They are protected against double taxation through the foreign tax credit, which allows taxpayers to deduct from their Canadian income tax otherwise payable the income tax paid in other countries. A citizen who is currently not a resident of Canada may petition the CRA to change his status so that income from outside Canada is not taxed.
[edit] Administration
Federal taxes are collected by the Canada Revenue Agency (CRA), formerly known as "Revenue Canada" or the "Canada Customs and Revenue Agency".
Under "Tax Collection Agreements", CRA collects and remits to the provinces:
- Provincial personal income taxes on behalf of all provinces except Quebec, so that individuals outside of Quebec file only one set of tax forms each year for their federal and provincial income taxes.
- Corporate taxes on behalf of all provinces except Quebec, Alberta and Ontario.
- Provincial sales taxes in New Brunswick, Nova Scotia and Newfoundland and Labrador.
The Ministère du revenu du Québec collects the GST in Quebec on behalf of the federal government, and remits it to Ottawa.
[edit] International comparison
| Comparison of taxes paid by a household earning the countries average wage | ||||||
|---|---|---|---|---|---|---|
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| Country | Single no kids |
Married 2 kids |
Country | Single no kids |
Married 2 kids |
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| Australia | 28.3% | 16.0% | Korea | 17.3% | 16.2% | |
| Austria | 47.4% | 35.5% | Luxembourg | 35.3% | 12.2% | |
| Belgium | 55.4% | 40.3% | Mexico | 18.2% | 18.2% | |
| Canada | 31.6% | 21.5% | Netherlands | 38.6% | 29.1% | |
| Czech Republic | 43.8% | 27.1% | New Zealand | 20.5% | 14.5% | |
| Denmark | 41.4% | 29.6% | Norway | 37.3% | 29.6% | |
| Finland | 44.6% | 38.4% | Poland | 43.6% | 42.1% | |
| France | 50.1% | 41.7% | Portugal | 36.2% | 26.6% | |
| Germany | 51.8% | 35.7% | Slovak Republic | 38.3% | 23.2% | |
| Greece | 38.8% | 39.2% | Spain | 39.0% | 33.4% | |
| Hungary | 50.5% | 39.9% | Sweden | 47.9% | 42.4% | |
| Iceland | 29.0% | 11.0% | Switzerland | 29.5% | 18.6% | |
| Ireland | 25.7% | 8.1% | Turkey | 42.7% | 42.7% | |
| Italy | 45.4% | 35.2% | United Kingdom | 33.5% | 27.1% | |
| Japan | 27.7% | 24.9% | United States | 29.1% | 11.9% | |
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| Source: OECD, 2005 data [3] | ||||||
[edit] See also
- Deposit Interest Retention Tax
- Dividend tax
- Fiscal neutrality
- International taxation
- Laffer curve and the optimal tax rate argument
- Revenue On-Line Service
- Tax incidence
- Tax avoidance/evasion
- Tax resistance
- Tax haven
- Tax law
