Income taxes in Canada provide for the vast majority of the federal government’s and provincial governments’ annual earnings. The federal government collected nearly three times more revenue from personal income taxes than it did from corporate income taxes in the fiscal year ended March 31, 2018.
Tax collection treaties allow various nations to assess taxes through a single administration and collection agency. Personal income taxes are collected by the federal government on behalf of all provinces and territories. Except for Alberta, it also collects corporate income taxes on behalf of all provinces and territories. The Canada Revenue Agency (CRA) is in charge of Canada’s federal income tax system.
The Income Tax Act of Canada imposes federal income taxes on both individuals and corporations in Canada. Various provincial statutes impose income taxes on the provinces and territories.
The Canadian income tax system is based on self-assessment. Taxpayers determine their tax liability by filing a return with the CRA by the due date. The CRA will then review the return based on the return submitted as well as information collected from employers and financial institutions, rectifying any evident inaccuracies. A taxpayer who disagrees with the CRA’s assessment of a specific return may file an appeal. The appeals procedure begins when a taxpayer files a formal objection 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.
Personal Income Taxes
Canada levies personal income tax on the worldwide income of individual residents in Canada and on certain types of Canadian-source income earned by non-resident individuals. The Income Tax Act, Part I, subparagraph 2(1), states: “An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year.”
After the calendar year, Canadian residents file a T1 Tax and Benefit Return 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:
- deduction at source – where income tax is deducted directly from an individual’s pay and sent to the CRA.
- installment payments – where an individual must pay his or her estimated taxes during the year instead of waiting to settle up at the end of the year.
- payment on filing – payments made with the income tax return
- arrears payments – payments made after the return is filed
Employers may also deduct Canada Pension Plan/Quebec Pension Plan (CPP/QPP) contributions, Employment Insurance (EI) and Provincial Parental Insurance (PPIP) premiums from their employee’s 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.
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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 the 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 five 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 $11,038 in 2013) by the lowest tax rate. This mechanism is designed to provide equal benefits to taxpayers regardless of the rate at which they pay taxes.
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. Donations can result in a reduction in taxes of between 40 and 60% of the donation depending on the province of the taxpayer and the type of property donated. 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:
- The dividend tax credit provides recognition of tax paid at the corporate level on income distributed from a Canadian corporation to individual shareholders; and
- The foreign tax credit recognizes tax paid to a foreign government on income earned in a foreign country.
Corporate Income Taxes
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).
Effective January 1, 2012, the net federal corporate income tax rate in Canada was 15%, or 11% for corporations able to claim the small business deduction; in addition, corporations are subject to provincial income tax that may range from zero to 16%, depending on the province and the size of the business.
The taxes payable by a Canadian resident corporation depend on the type of corporation that it is:
- A Canadian-controlled private corporation, is defined as a corporation that is:
- resident in Canada and either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the taxation year;
- not controlled directly or indirectly by one or more non-resident persons;
- not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700);
- not controlled by a Canadian resident corporation that lists its shares on a prescribed stock exchange outside of Canada;
- not controlled directly or indirectly by any combination of persons described in the three preceding conditions; if all of its shares that are owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation with a class of shares listed on a prescribed stock exchange, were owned by one person, that person would not own sufficient shares to control the corporation; and
- no class of its shares of capital stock is listed on a prescribed stock exchange.
- A private corporation, which is defined as a corporation that is:
- resident in Canada;
- not a public corporation;
- not controlled by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700);
- not controlled by one or more prescribed federal Crown corporations (as defined in Regulation 7100); and
- not controlled by any combination of corporations described in the two preceding conditions.
- A public corporation, is defined as a corporation that is resident in Canada and meets either of the following requirements at the end of the taxation year:
- it has a class of shares listed on a prescribed Canadian stock exchange; or
- it has elected, or the Minister of National Revenue has designated it, to be a public corporation and the corporation has complied with prescribed conditions under Regulation 4800(1) on the number of its shareholders, the dispersing of the ownership of its shares, the public trading of its shares, and the size of the corporation.
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.
Canada vs. U.S. Tax Rates
A common belief among many Canadians is that they pay more in income tax than their American counterparts. Even politicians in Parliament have used this argument to press for lower taxes. But is it really true? The differences in income tax rates, taxable income amounts, the services provided, and costs beyond taxes make broad conclusions difficult and most likely require people to assess their financial situations individually.
Determining whether Canadians pay more in taxes than Americans is more complex than you might think.
Statistics-gathering agencies in both countries publish averages of income taxes paid, but comparing the two numbers is like comparing the stats of a hockey player with those of a basketball player. The numbers are based on different premises and reflect different factors.
Using an average is also problematic as extreme wealth inequality skews the data on both ends. In general, lower-income Canadians pay less in tax than lower-income Americans for the services they receive and rich Americans are better off than rich Canadians.
Here’s a breakdown of the relevant tax components and their contribution to the overall tax story.
Federal Income Taxes
For tax year 2023, U.S. federal income tax brackets range from 10% to 37% for individuals. In Canada, the range is 15% to 33%. In the U.S., the lowest tax bracket is 10% for an individual earning $11,000 or less and jumps to 22% (after the 12% bracket) for those earning over $44,725. The corresponding bottom Canadian bracket of 15% applies to income up to $53,359 (in Canadian dollars).
State vs. Provincial Income Taxes
Comparing state and provincial income taxes is a more problematic endeavor. U.S. state taxation is completely outside of the federal tax system and each state has its own tax laws regarding deductions and credits. Some states, like Florida and Alaska, have no state income tax at all whereas all Canadian provinces and territories levy an income tax.
In Canada, however, provincial income taxes (except in Quebec) are coordinated with the federal tax system and are based on a percentage of federal tax. This means that the provinces have the same allowable deductions and income rules as the federal system. Each province also has additional credits and incentives.