Income taxes in Canada constitute the majority of the annual revenues of the Government of Canada, and of the governments of the Provinces of Canada. In the last fiscal year, the government collected roughly three times more personal income taxes than it did corporate income taxes.[1]
Tax collection agreements enable different governments to levy taxes through a single administration and collection agency. The federal government collects personal income taxes on behalf of all provinces and territories except Quebec and collects corporate income taxes on behalf of all provinces and territories except Alberta and Quebec. Canada's federal income tax system is administered by the Canada Revenue Agency (CRA).
Canadian federal income taxes, both personal and corporate are levied under the provisions of the Income Tax Act.[2] Provincial and territorial income taxes are levied under various provincial statutes.
The Canadian income tax system is a self-assessment regime. Taxpayers assess their tax liability by filing a return with the CRA by the required filing deadline. CRA will then assess the return based on the return filed and on information it has obtained from employers and financial companies, correcting it for obvious errors. A taxpayer who disagrees with CRA's assessment of a particular return may appeal the assessment. The appeal process starts when a taxpayer formally objects to the CRA assessment. The objection must explain, in writing, the reasons for the appeal along with all the related facts. The objection is then reviewed by the appeals branch of CRA. An appealed assessment may either be confirmed, vacated or varied by the CRA. If the assessment is confirmed or varied, the taxpayer may appeal the decision to the Tax Court of Canada and then to the Federal Court of Appeal.
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Unlike the United Kingdom and the United States, Canada avoided charging an income tax prior to World War I. The lack of income tax was seen as a key component in Canada's efforts to attract immigrants as Canada offered a lower tax regime compared to almost every other country. Prior to the war Canadian federal governments relied on tariffs and customs income under the auspices of the National Policy for most of their revenue, while the provincial governments sustained themselves primarily through their management of natural resources (the Prairie provinces being paid subsidies by the federal government as Ottawa retained control of their natural resources for the time being). The federal Liberal Party considered the probable need to introduce an income tax should their negotiation of a free trade agreement with the United States in the early 20th century succeed, but the Conservatives defeated the Liberals in 1911 over their support of free trade.
The Conservatives opposed income tax as they wanted to attract immigrants primarily from the United Kingdom and the United States, as opposed to Eastern Europe, and they wanted to give their preferred choice of newcomers some incentive to come to Canada. Wartime expenses forced the Tories to re-consider their options and in 1917 the wartime government under Robert Borden imposed a "temporary" income tax to cover expenses. Despite the new tax the Canadian government ran up considerable debts during the war and were unable to forego income tax revenue after the war ended. With the election of the Liberal government of Prime Minister William Lyon MacKenzie King, much of the National Policy was dismantled and income tax has remained in place ever since.
The constitutional authority for the federal income tax is found in section 91 paragraph 3 of the Constitution Act, 1867, which assigns to the federal Parliament power over "The raising of Money by any Mode or System of Taxation".
The constitutional authority for the various provincial income taxes is found in section 92 paragraph 2 of the Constitution Act, 1867, which assigns to the legislature of each province the power of "Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes". The courts have held that "an income tax is the most typical form of direct taxation".[3]
Canada levies personal income tax on the worldwide income of individuals resident in Canada and on certain types of Canadian-source income earned by non-resident individuals.
After the calendar year, Canadian residents file a T1 Tax and Benefit Return[4] for individuals. It is due April 30, or June 15 for self-employed individuals and their spouses, or common-law partners. It is important to note, however, that any balance owing is due on or before April 30. Outstanding balances remitted after April 30 may be subject to interest charges, regardless of whether the taxpayer's filing due date is April 30 or June 15.
The amount of income tax that an individual must pay is based on the amount of their taxable income (income earned less allowed expenses) for the tax year. Personal income tax may be collected through various means:
Employers may also deduct Canada Pension Plan/Quebec Pension Plan (CPP/QPP) contributions, Employment Insurance (EI) and Provincial Parental Insurance (PPIP) premiums from their employees' gross pay. Employers then send these deductions to the taxing authority.
Individuals who have overpaid taxes or had excess tax deducted at source will receive a refund from the CRA upon filing their annual tax return.
Generally, personal income tax returns for a particular year must be filed with CRA on or before April 30 of the following year.
An individual taxpayer must report his or her total income for the year. Certain deductions are allowed in determining "net income", such as deductions for contributions to Registered Retirement Savings Plans, union and professional dues, child care expenses, and business investment losses. Net income is used for determining several income-tested social benefits provided by the federal and provincial/territorial governments. Further deductions are allowed in determining "taxable income", such as capital losses, half of capital gains included in income, and a special deduction for residents of northern Canada. Deductions permit certain amounts to be excluded from taxation altogether.
"Tax payable before credits" is determined using four tax brackets and tax rates. Non-refundable tax credits are then deducted from tax payable before credits for various items such as a basic personal amount, dependents, Canada/Quebec Pension Plan contributions, Employment Insurance premiums, disabilities, tuition and education and medical expenses. These credits are calculated by multiplying the credit amount (e.g., the basic personal amount of $10,822 in 2012) by the lowest tax rate. This mechanism is designed to provide equal benefit to taxpayers regardless of the rate at which they pay tax.
A non-refundable tax credit for charitable donations is calculated at the lowest tax rate for the first $200 in a year, and at the highest tax rate for the portion in excess of $200. This tax credit is designed to encourage more generous charitable giving.
Certain other tax credits are provided to recognize tax already paid so that the income is not taxed twice:
Provinces and territories that have entered into tax collection agreements with the federal government for collection of personal income taxes ("agreeing provinces", i.e., all provinces and territories except Quebec) must use the federal definition of "taxable income" as the basis for their taxation. This means that they are not allowed to provide or ignore federal deductions in calculating the income on which provincial tax is based.
Provincial and territorial governments provide both non-refundable tax credits and refundable tax credits to taxpayers for certain expenses. They may also apply surtaxes and offer low-income tax reductions.
Canada Revenue Agency collects personal income taxes for agreeing provinces/territories and remits the revenues to the respective governments. The provincial/territorial tax forms are distributed with the federal tax forms, and the taxpayer need make only one payment—to CRA—for both types of tax. Similarly, if a taxpayer is to receive a refund, he or she receives one cheque or bank transfer for the combined federal and provincial/territorial tax refund. Information on provincial rates can be found on the Canada Revenue Agency's website.[5]
Quebec administers its own personal income tax system, and therefore is free to determine its own definition of taxable income. To maintain simplicity for taxpayers, however, Quebec parallels many aspects of and uses many definitions found in the federal tax system.
The following historical federal marginal tax rates of the Government of Canada come from the website of the Canada Revenue Agency. They do not include applicable provincial income taxes. Data on marginal tax rates from 1998 to 2006 are publicly available.[6] Data on basic personal amounts (personal exemption taxed at 0%) can be found on a year by year basis is also available.[7] Their values are contained on line 300 of either the document "Schedule 1 - Federal Tax", or "General Income Tax and Benefit Guide", of each year by year General Income Tax and Benefit Package listed.
| Canadian federal marginal tax rates of taxable income | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2012 (est.) | $0 – $10,822 | $10,823 - $42,706 | $42,707 - $85,413 | $85,414 - $132,405 | over $132,406 | |||
| 0% | 15% | 22% | 26% | 29% | ||||
| 2011 [8] |
$0 – $10,527 | $10,528 - $41,544 | $41,544 - $83,088 | $83,088 - $128,800 | over $128,800 | |||
| 0% | 15% | 22% | 26% | 29% | ||||
| 2010 [8] |
$0 – $10,382 | $10,383 - $40,970 | $40,971 - $81,941 | $81,942 - $127,021 | over $127,021 | |||
| 0% | 15% | 22% | 26% | 29% | ||||
| 2009 [8] |
$0 – $10,320 | $10,321 - $40,726 | $40,727 - $81,452 | $81,453 - $126,264 | over $126,264 | |||
| 0% | 15% | 22% | 26% | 29% | ||||
| 2008 |
$0 – $9,600 | $9,601 - $37,885 | $37,886 - $75,769 | $75,770 - $123,184 | over $123,184 | |||
| 0% | 15% | 22% | 26% | 29% | ||||
| 2007 | $0 – $9,600 | $9,600 - $37,178 | $37,178 - $74,357 | $74,357 - $120,887 | over $120,887 | |||
| 0% | 15% | 22% | 26% | 29% | ||||
| 2006 | $0 – $8,839 | $8,839 - $36,378 | $36,378 - $72,756 | $72,756 - $118,285 | over $118,285 | |||
| 0% | 15.25% | 22% | 26% | 29% | ||||
| 2005 | $0 – $8,648 | $8,648 - $35,595 | $35,595 - $71,190 | $71,190 - $115,739 | over $115,739 | |||
| 0% | 15% | 22% | 26% | 29% | ||||
| 2004 | $0 – $8,012 | $8,012 - $35,000 | $35,000 - $70,000 | $70,000 - $113,804 | over $113,804 | |||
| 0% | 16% | 22% | 26% | 29% | ||||
| 2003 | $0 – $7,756 | $7,756 - $32,183 | $32,183 - $64,368 | $64,368 - $104,648 | over $104,648 | |||
| 0% | 16% | 22% | 26% | 29% | ||||
| 2002 | $0 – $7,634 | $7,634 - $31,677 | $31,677 - $63,354 | $63,354 - $103,000 | over $103,000 | |||
| 0% | 16% | 22% | 26% | 29% | ||||
| 2001 | $0 – $7,412 | $7,412 - $30,754 | $30,754 - $61,509 | $61,509 - $100,000 | over $100,000 | |||
| 0% | 16% | 22% | 26% | 29% | ||||
| 2000 | $0 – $7,231 | $7,231 - $30,004 | $30,004 - $60,009 | over $60,009 | ||||
| 0% | 17% | 25% | 29% | |||||
| 1999 | $0 – $6,794 | $6,794 - $29,590 | $29,590 - $59,180 | over $59,180 | ||||
| 0% | 17% | 26% | 29% | |||||
| 1998 | $0 – $6,794 | $6,794 - $29,590 | $29,590 - $59,180 | over $59,180 | ||||
| 0% | 17% | 26% | 29% | |||||
The following types of income are not taxed in Canada (this list is not exhaustive):
Note that the method by which these forms of income are not taxed can vary significantly, which may have tax and other implications; some forms of income are not declared, while others are declared and then immediately deducted in full. Some of the tax exemptions are based on statutory enactments, others (like the non-taxability of lottery winnings) are based on the non-statutory common law concept of "income". In certain cases, the deduction may require off-setting income, while in other cases, the deduction may be used without corresponding income. Income which is declared and then deducted, for example, may create room for future Registered Retirement Savings Plan deductions. But then the RRSP contribution room may be reduced with a pension adjustment if you are part of another plan, reducing the ability to use RRSP contributions as a deduction.
Deductions which are not directly linked to non-taxable income exist, which reduce overall taxable income. A key example is Registered Retirement Savings Plan (RRSP) contributions, which is a form of tax-deferred savings account (income tax is paid only at withdrawal, and no interim tax is payable on account earnings).
*Quebec has changed its rules in 2004 and, legally, this may be taxed or may not – Courts have yet to rule.
Corporate taxes include taxes on corporate income in Canada and other taxes and levies paid by corporations to the various levels of government in Canada. These include capital and insurance premium taxes; payroll levies (e.g., employment insurance, Canada Pension Plan, Quebec Pension Plan and Workers' Compensation); property taxes; and indirect taxes, such as goods and services tax (GST), and sales and excise taxes, levied on business inputs.
Corporations are subject to tax in Canada on their worldwide income if they are resident in Canada for Canadian tax purposes. Corporations not resident in Canada are subject to Canadian tax on certain types of Canadian source income (Section 115 of the Canadian Income Tax Act).
The taxes payable by a Canadian resident corporation may be impacted by the type of corporation that it is:
If a public corporation has complied with certain prescribed conditions under Regulation 4800(2), it can elect, or the Minister of National Revenue can designate it, not to be a public corporation. Other types of Canadian resident corporations include Canadian subsidiaries of public corporations (which do not qualify as public corporations), general insurers and Crown corporations.
Corporate income taxes are collected by the CRA for all provinces and territories except Quebec and Alberta. Provinces and territories subject to a tax collection agreement must use the federal definition of "taxable income", i.e., they are not allowed to provide deductions in calculating taxable income. These provinces and territories may provide tax credits to companies, often in order to provide incentives for certain activities such as mining exploration, film production, and job creation.
Quebec and Alberta collect their own corporate income taxes, and therefore may develop their own definitions of taxable income. In practice, these provinces rarely deviate from the federal tax base in order to maintain simplicity for taxpayers.
Ontario negotiated a tax collection agreement with the federal government under which its corporate income taxes would be collected on its behalf by the CRA starting in 2009.
In Canada, corporate income is subject to corporate income tax and, on distribution as dividends to individuals, personal income tax. To avoid this "double taxation" of the same income, the personal income tax system, through the gross-up and dividend tax credit (DTC) mechanisms, provides recognition for corporate taxes, based notional federal-provincial corporate tax rates, to taxable individuals resident in Canada who receive dividends from Canadian corporations.
A dividend from a small business ("Canadian-controlled private corporation") is grossed-up by 25 per cent, meaning that the shareholder includes 125 per cent of the dividend amount in income, to reflect the pre-tax income of the small business out of which it has paid the dividend. This income is taxed at the shareholder's personal income tax rate, by a part of the tax is offset by a 13.3333% dividend tax credit (for 2010)[9] to reflect the tax paid at the corporate level.
For dividends from other Canadian corporations, i.e., "eligible dividends", the gross-up is 45% and the dividend tax credit is 17.9739% (for 2010)[10], reflecting the higher corporate income tax rate paid by larger corporations. Provincial and territorial governments also provide dividend tax credits to reflect provincial/territorial corporate income tax.
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