In Canada, taxes is a joint responsibility between the federal government and several provincial and territorial governments.

Federal taxes are collected by the Canada Revenue Agency (CRA). Under tax collection agreements, the CRA collects and remits to the provinces:

• provincial personal income taxes on behalf of all provinces except Quebec, through a system of unified tax returns.
• corporate taxes on behalf of all provinces except Quebec and Alberta.
• that portion of the Harmonized Sales Tax that is in excess of the federal Goods and Services Tax (GST) rate, with respect to the provinces that have implemented it.

The Agence du Revenu du Québec collects the GST in Quebec on behalf of the federal government and remits it to Ottawa.

Income Taxes

The Parliament of Canada entered the field with the passage of the Business Profits War Tax Act, of 1916 (essentially a tax on larger businesses, chargeable on any accounting periods ending after 1914 and before 1918). It was replaced in 1917 by the Income War Tax Act, 1917 (covering personal and corporate income earned from 1917 onwards). Similar taxes were imposed by the provinces in the following years.

Similar taxes were imposed by the provinces in the following years.^[21]

Province	Introduction of personal income tax	Introduction of corporate income tax	Tax collection assumed by federal government	Personal tax collection resumed by province	Corporate tax collection resumed by province	Corporate tax collection resumed by federal government
British Columbia	1876	1901	1941
Alberta	1932	1932	1941		1981
Saskatchewan	1932	1932	1941
Manitoba	1923	1924	1938
Ontario	1936	1932	1936		1947	2009
Québec	1939	1932	1940	1954	1947
New Brunswick			1941
Nova Scotia			1941
Prince Edward Island	1894	1894	1938
Newfoundland and Labrador			1949

Municipal income taxes existed as well in certain municipalities, but such taxation powers were gradually abolished as the provinces established their own collection régimes, and none survived the Second World War, as a consequence of the Wartime Tax Rental Agreements.

• From 1850, municipal councils in Ontario possessed authority to levy taxes on income, where such amount was greater than the value of a taxpayer’s personal property. The personal property limitation was removed with the passage of the Assessment Act in 1904. By 1936, some 200 councils ranging in size from Toronto to Blenheim Township were collecting such taxes. Toronto levied personal income taxes until 1936, and corporate income taxes until 1944.
• From 1855 to 1870, and once more from 1939, income tax was imposed on residents of Quebec City. In 1935, a municipal income tax was imposed on the income of individuals resident or doing business in Montreal and the municipalities of the Montreal Metropolitan Commission. Similar income taxes were also imposed in Sherbrooke from 1886 to 1912, in Sorel from 1889, and Hull from 1893.
• In Prince Edward Island, Summerside had an income tax from 1870 to 1880, and Charlottetown imposed one from 1880 to 1888.
• While Nova Scotia permitted municipal income tax in 1835, Halifax was the first municipality to levy one in 1849.
• New Brunswick allowed the collection of income taxes in 1831. However, serious enforcement did not begin until 1849, but it was only in 1908 when all municipalities in the province were required to collect it.

Personal Income Taxes

Both the federal and provincial governments have imposed income taxes on individuals, and these are the most significant sources of revenue for those levels of government accounting for over 45% of tax revenue. The federal government charges the bulk of income taxes with the provinces charging a somewhat lower percentage, except in Quebec. Income taxes throughout Canada are progressive with the high income residents paying a higher percentage than the low income.

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.

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Settlements and legal damages are generally not taxable, even in circumstances where damages (other than unpaid wages) arise as a result of breach of contract in an employment relationship.

Federal and provincial income tax rates are shown at the Canada Revenue Agency’s website.

Personal income tax can be deferred in a Registered Retirement Savings Plan (RRSP) (which may include mutual funds and other financial instruments) that are intended to help individuals save for their retirement. Tax-Free Savings Accounts allow people to hold financial instruments without taxation on the income earned.

Corporate Taxes

Companies and corporations pay corporate 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 dividends 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 income for tax purposes; the other half is not taxed.)

Corporations may deduct the cost of capital following capital cost allowance regulations. The Supreme Court of Canada has interpreted the Capital Cost Allowance in a fairly broad manner, allowing deductions on property that was owned for a very brief period of time, and property that is leased back to the vendor from which it originated.

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.

Capital tax is a tax charged on a corporation’s taxable capital. Taxable capital is the amount determined under Part 1.3 of the Income Tax Act (Canada) plus accumulated other comprehensive income.

On January 1, 2006, capital tax was eliminated at the federal level. Some provinces continued to charge corporate capital taxes, but effective July 1, 2012, provinces have stopped levying corporation capital taxes. In Ontario the corporate capital tax was eliminated July 1, 2010 for all corporations, although it was eliminated effective January 1, 2007, for Ontario corporations primarily engaged in manufacturing or resource activities. In British Columbia the corporate capital tax was eliminated as of April 1, 2010.

From 1932 until 1951, Canadian companies were able to file consolidated tax returns, but this was repealed with the introduction of the business loss carryover rules. In 2010, the Department of Finance launched consultations to investigate whether corporate taxation on a group basis should be reintroduced. As no consensus was reached in such consultations, it was announced in the 2013 Budget that moving to a formal system of corporate group taxation was not a priority at this time.

International Taxation

Canadian residents and corporations pay income taxes based on their worldwide income. Canadians are in principle protected against double taxation receiving income from certain countries that gave agreements with Canada through the foreign tax credit, which allows taxpayers to deduct from their Canadian income tax otherwise payable from the income tax paid in other countries. A citizen who is currently not a resident of Canada may petition the CRA to change her or his status so that income from outside Canada is not taxed.

Non-residents of Canada with taxable earnings in Canada (e.g. rental income and property disposition income) are required to pay Canadian income tax on these amounts. Rents paid to non-residents are subject to a 25% withholding tax on the “gross rents”, which is required to be withheld and remitted to Canada Revenue Agency (“CRA”) by the payer (i.e. the Canadian agent of the non-resident, or if there is no agent, the renter of the property) each time rental receipts are paid or credited to the account of the non-resident by the payer. If the payer does not remit the required withholding taxes by the 15th day following the month of payment to the non-resident, the payer will be subject to penalties and interest on the unpaid amounts.

What Kind of Taxes do Canadians Pay?

Individuals resident in Canada are subject to Canadian income tax on worldwide income. Relief from double taxation is provided through Canada’s international tax treaties, as well as via foreign tax credits and deductions for foreign taxes paid on income derived from non-Canadian sources.

Non-resident individuals are subject to Canadian income tax on income from employment in Canada, income from carrying on a business in Canada and capital gains from the disposition of taxable Canadian property.

Individuals resident in Canada for only part of a year are taxable in Canada on worldwide income only for the period during which they were resident.

Personal tax credits, miscellaneous tax credits, and the dividend tax credit are subtracted from tax to determine the federal tax liability.

Personal income tax rates

2023 federal tax rates are as follows:

Federal taxable income (CAD)		Tax on first column (CAD)	Tax on excess (%)
Over	Not over
0	53,359	0	15.0
53,359	106,717	8,004	20.5
106,717	165,430	18,942	26.0
165,430	235,675	34,208	29.0
235,675		54,579	33.0

Provincial/territorial income taxes

In addition to federal income tax, an individual who resides in, or has earned income in, any province or territory is subject to provincial or territorial income tax. Except in Quebec, provincial and territorial taxes are calculated on the federal return and collected by the federal government. Rates vary among the jurisdictions. Two provinces also impose surtaxes that may increase the provincial income taxes payable. Provincial and territorial taxes are not deductible when computing federal, provincial, or territorial taxable income.

All provinces and territories compute income tax using ‘tax-on-income’ systems (i.e. they set their own rates, brackets, and credits). All except Quebec use the federal definition of taxable income.

The following table shows the top 2023 provincial/territorial tax rates and surtaxes. The provincial/territorial tax rates are applicable starting at the taxable income levels shown below. Surtax rates apply to provincial tax above the surtax thresholds shown.

Recipient	Provincial/territorial tax		Provincial/territorial surtax
	Top rate (%)	Taxable income (CAD)	Rate (%)	Threshold (CAD)
Alberta	15.0	341,502	N/A	N/A
British Columbia	20.5	240,716	N/A	N/A
Manitoba	17.4	79,625	N/A	N/A
New Brunswick	19.5	176,756	N/A	N/A
Newfoundland and Labrador	21.8	1,059,000	N/A	N/A
Northwest Territories	14.05	157,139	N/A	N/A
Nova Scotia	21.0	150,000	N/A	N/A
Nunavut	11.5	165,429	N/A	N/A
Ontario	13.16	220,000	20 and 56	5,315 and 6,802
Prince Edward Island	16.7	63,969	10	12,500
Quebec (1)	25.75	119,910	N/A	N/A
Saskatchewan	14.5	142,058	N/A	N/A
Yukon	15.0	500,000	N/A	N/A
Non-resident	15.84 (2)	235,675	N/A	N/A

Notes

1. Quebec has its own personal tax system, which requires a separate calculation of taxable income. Recognising that Quebec collects its own tax, federal income tax is reduced by 16.5% of basic federal tax for Quebec residents.
2. Instead of provincial or territorial tax, non-residents pay an additional 48% of basic federal tax on income taxable in Canada that is not earned in a province or territory. Non-residents are subject to provincial or territorial rates on employment income earned, and business income connected with a permanent establishment (PE), in the respective province or territory. Different rates may apply to non-residents in other circumstances. 

Combined federal/provincial (or federal/territorial) effective top marginal tax rates for 2023 are shown below. The rates reflect all 2023 federal, provincial, and territorial budgets (which are usually introduced in the spring of each year). The rates include all provincial/territorial surtaxes, and apply to taxable incomes above CAD 235,675 in all jurisdictions except:

• CAD 341,502 in Alberta.
• CAD 240,716 in British Columbia.
• CAD 1,059,000 in Newfoundland and Labrador.
• CAD 500,000 in Yukon.

Recipient	Highest federal/provincial (or territorial) tax rate (%)
	Interest and ordinary income	Capital gains	Canadian dividends
			Eligible (1)	Non-eligible (1)
Alberta	48.0	24.0	34.3	42.3
British Columbia	53.5	26.8	36.5	48.9
Manitoba	50.4	25.2	37.8	46.7
New Brunswick	52.5	26.3	32.4	46.8
Newfoundland and Labrador	54.8	27.4	46.2	49.0
Northwest Territories	47.1	23.5	28.3	36.8
Nova Scotia	54.0	27.0	41.6	48.3
Nunavut	44.5	22.3	33.1	37.8
Ontario	53.5	26.8	39.3	47.7
Prince Edward Island	51.4	25.7	34.2	47.0
Quebec	53.3	26.7	40.1	48.7
Saskatchewan	47.5	23.8	29.6	41.8
Yukon	48.0	24.0	28.9	44.0
Non-resident (2)	48.8	24.4	36.7	40.8

Notes

1. See Dividend Income in the Income Determination section for more information on eligible and non-eligible dividends.
2. Non-resident rates for interest and dividends apply only in limited circumstances. Generally, interest (other than most interest paid to arm’s-length non-residents) and dividends paid to non-residents are subject to Canadian withholding tax (WHT).

Alternative Minimum Tax (AMT)

In addition to the normal tax computation, individuals are required to compute an adjusted taxable income and include certain ‘tax preference’ items that are otherwise deductible or exempt in the calculation of regular taxable income. If the adjusted taxable income exceeds the minimum tax exemption of CAD 40,000, a combined federal and provincial/territorial tax rate of about 25% is applied to the excess, yielding the AMT.

The taxpayer then pays the greater of regular tax or the AMT. Taxpayers required to pay the AMT are entitled to a credit in future years when their regular tax liability exceeds their AMT level for that year.

Draft legislative proposals change the federal AMT calculation, effective for taxation years beginning after 2023, by:

• increasing the federal AMT rate from 15% to 20.5% and the AMT exemption from CAD 40,000 to the start of the second from top federal tax bracket (i.e. CAD 165,430 in 2023; to be indexed for 2024 and subsequent years)
• broadening the AMT base through changes to the ‘tax preference’ inclusions in the AMT adjusted taxable income calculation, and
• allowing only 50% of most non-refundable tax credits to reduce AMT.

Kiddie tax

A minor child that receives certain passive income under an income splitting arrangement is subject to tax at the highest combined federal/provincial (or territorial) marginal rate (i.e. up to 55%), referred to as ‘kiddie tax’. Personal tax credits, other than the dividend, disability, and foreign tax credits, or other deductions cannot be claimed to reduce the kiddie tax.

‘Income sprinkling’

‘Income sprinkling’ (i.e. shifting income that would otherwise be realized by a high-tax individual [e.g. through dividends or capital gains] to low or nil tax rate family members) using private corporations is restricted by making certain aspects of the ‘kiddie tax’ rules also apply to adults in certain situations. The ‘split income’ of the adult family member will be subject to tax at the highest combined federal/provincial (or territorial) marginal rate (i.e. up to 55%). Personal tax credits, other than the dividend, disability, and foreign tax credits, or other deductions cannot be claimed to reduce this tax.

Corporations in Canada, including non-profits and inactive corporations, pay tax on both profits and on capital. Corporate taxes are levied at the federal level, as well as the provincial level. The corporate tax rate therefore varies not only by the type and size of the corporation, but also by its province of operation.