Income taxes in Canada
Encyclopedia
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.
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. 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.
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 tariff
s 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.
, 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".
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:
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.
s, 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 $10,382 in 2010) 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:
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.
s 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. Data on basic personal amounts (personal exemption taxed at 0%) can be found on a year by year basis is also available. 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.
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.
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.
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.
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) 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), 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.
Government of Canada
The Government of Canada, formally Her Majesty's Government, is the system whereby the federation of Canada is administered by a common authority; in Canadian English, the term can mean either the collective set of institutions or specifically the Queen-in-Council...
, 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.
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
Quebec
Quebec or is a province in east-central Canada. It is the only Canadian province with a predominantly French-speaking population and the only one whose sole official language is French at the provincial level....
and collects corporate income taxes on behalf of all provinces and territories except Alberta
Alberta
Alberta is a province of Canada. It had an estimated population of 3.7 million in 2010 making it the most populous of Canada's three prairie provinces...
and Quebec. Canada's federal income tax system is administered by the Canada Revenue Agency
Canada Revenue Agency
The Canada Revenue Agency is a federal agency that administers tax laws for the Government of Canada and for most provinces and territories, international trade legislation, and various social and economic benefit and incentive programs delivered through the tax system...
(CRA).
Canadian federal income taxes, both personal and corporate are levied under the provisions of the Income Tax Act. Provincial and territorial income taxes are levied under various provincial statutes.
The Canadian income tax system is a self-assessment
Self-assessment
In social psychology, self-assessment is the process of looking at oneself in order to assess aspects that are important to one's identity. It is one of the motives that drive self-evaluation, along with self-verification and self-enhancement...
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
Tax Court of Canada
The Tax Court of Canada , established in 1983 by the Tax Court of Canada Act, is a federal superior court which deals with matters involving companies or individuals and tax issues with the Government of Canada....
and then to the Federal Court of Appeal.
History
Unlike the United KingdomUnited Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
and the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, Canada avoided charging an income tax prior to World War I
World War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
. 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 tariff
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
s and customs
Customs
Customs is an authority or agency in a country responsible for collecting and safeguarding customs duties and for controlling the flow of goods including animals, transports, personal effects and hazardous items in and out of a country...
income under the auspices of the National Policy
National Policy
The National Policy was a Canadian economic program introduced by John A. Macdonald's Conservative Party in 1876 and put into action in 1879. It called for high tariffs on imported manufactured items to protect the manufacturing industry...
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
Robert Borden
Sir Robert Laird Borden, PC, GCMG, KC was a Canadian lawyer and politician. He served as the eighth Prime Minister of Canada from October 10, 1911 to July 10, 1920, and was the third Nova Scotian to hold this office...
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
William Lyon Mackenzie King
William Lyon Mackenzie King, PC, OM, CMG was the dominant Canadian political leader from the 1920s through the 1940s. He served as the tenth Prime Minister of Canada from December 29, 1921 to June 28, 1926; from September 25, 1926 to August 7, 1930; and from October 23, 1935 to November 15, 1948...
, much of the National Policy was dismantled and income tax has remained in place ever since.
Constitutional authority
The constitutional authority for the federal income tax is found in section 91 paragraph 3 of the Constitution Act, 1867Constitution Act, 1867
The Constitution Act, 1867 , is a major part of Canada's Constitution. The Act created a federal dominion and defines much of the operation of the Government of Canada, including its federal structure, the House of Commons, the Senate, the justice system, and the taxation system...
, 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".
Personal income taxes
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 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 returnTax return (Canada)Normally, Canadian Individual tax returns for any specific year must be filedby April 30 of the following year. There is no provision for generally extending this deadline, but there are a few exceptions....
- arrears payments - payments made after the return is filed
Employers may also deduct Canada Pension Plan
Canada Pension Plan
The Canada Pension Plan is a contributory, earnings-related social insurance program. It forms one of the two major components of Canada's public retirement income system, the other component being Old Age Security...
/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.
Basic calculation
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 PlanRegistered Retirement Savings Plan
A Registered Retirement Savings Plan or RRSP is a type of Canadian account for holding savings and investment assets. Introduced in 1957, the RRSP's purpose is to promote savings for retirement by employees. It must comply with a variety of restrictions stipulated in the Canadian Income Tax Act...
s, 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 $10,382 in 2010) 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:
- 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.
Provincial and territorial personal income taxes
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.
Quebec
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.Personal federal marginal tax rates
The following historical federal marginal tax rateMarginal tax rate
In a tax system and in economics, the tax rate describes the burden ratio at which a business or person is taxed. There are several methods used to present a tax rate: statutory, average, marginal, effective, effective average, and effective marginal...
s of the Government of Canada come from the website of the Canada Revenue Agency
Canada Revenue Agency
The Canada Revenue Agency is a federal agency that administers tax laws for the Government of Canada and for most provinces and territories, international trade legislation, and various social and economic benefit and incentive programs delivered through the tax system...
. They do not include applicable provincial income taxes. Data on marginal tax rates from 1998 to 2006 are publicly available. Data on basic personal amounts (personal exemption taxed at 0%) can be found on a year by year basis is also available. 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 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2011 |
$0 – $10,527 | $10,528 - $41,544 | $41,544 - $83,088 | $83,088 - $128,800 | over $128,800 | |||
| 0% | 15% | 22% | 26% | 29% | ||||
| 2010 |
$0 – $10,382 | $10,383 - $40,970 | $40,971 - $81,941 | $81,942 - $127,021 | over $127,021 | |||
| 0% | 15% | 22% | 26% | 29% | ||||
| 2009 |
$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% | |||||
Income not taxed
The following types of income are not taxed in Canada (this list is not exhaustive):- gifts and inheritances;
- lottery winnings;
- winnings from betting or gambling for simple recreation or enjoyment;
- strike pay;
- compensation paid by a province or territory to a victim of a criminal act or a motor vehicle accident*;
- certain civil and military service pensions;
- income from certain international organizations of which Canada is a member, such as the United Nations and its agencies;
- war disability pensions;
- RCMP pensions or compensation paid in respect of injury, disability, or death*;
- income of First NationsFirst NationsFirst Nations is a term that collectively refers to various Aboriginal peoples in Canada who are neither Inuit nor Métis. There are currently over 630 recognised First Nations governments or bands spread across Canada, roughly half of which are in the provinces of Ontario and British Columbia. The...
, if situated on a reserve; - capital gain on the sale of a taxpayer’s principal residence;
- provincial child tax credits or benefits and Québec family allowances;
- Working income tax benefit;
- the Goods and Services TaxGoods and Services Tax (Canada)The Goods and Services Tax is a multi-level value added tax introduced in Canada on January 1, 1991, by then Prime Minister Brian Mulroney and his finance minister Michael Wilson. The GST replaced a hidden 13.5% Manufacturers' Sales Tax ; Mulroney claimed the GST was implemented because the MST...
or Harmonized Sales TaxHarmonized Sales TaxThe Harmonized Sales Tax is the name used in Canada to describe the combination of the federal Goods and Services Tax and the regional Provincial Sales Tax into a single value added sales tax in five of the ten Canadian provinces: Ontario, New Brunswick, Newfoundland and Labrador, British...
credit (GST/HST credit) or Quebec Sales Tax credit; and - the Canada Child Tax BenefitCanada Child Tax BenefitThe Canada Child Tax Benefit is a tax-free monthly payment available to eligible Canadian families to help with the cost of raising children...
.
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).
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).
The taxes payable by a Canadian resident corporation may be impacted by the type of corporation that it is:
- A Canadian-controlled private corporation, which 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, 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.
Provincial/territorial corporate income taxes
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.
Integration of corporate and personal income taxes
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) 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), 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.
See also
- Comparison of Canadian tax software
- Canadian federal budgetCanadian federal budgetIn Canada, federal budgets are presented annually by the Government of Canada to identify planned government spending, expected government revenue, and forecast economic conditions for the upcoming year....
- Foreign Accrual Property IncomeForeign Accrual Property IncomeForeign Accrual Property Income, usually known as FAPI, is a tax term meaning the government will tax foreign earnings, regardless of tax treaties, if it deems the source of earning to only be "investment activity". It is a law applied in countries such as Canada.-Definition:Let's say you're a...
- Harmonized Sales TaxHarmonized Sales TaxThe Harmonized Sales Tax is the name used in Canada to describe the combination of the federal Goods and Services Tax and the regional Provincial Sales Tax into a single value added sales tax in five of the ten Canadian provinces: Ontario, New Brunswick, Newfoundland and Labrador, British...
External links
- The Canadian Tax Foundation
- The Department of Finance, Canada - responsible for Canadian tax policy
- Canada Revenue Agency - collect income other certain other taxes for the federal, provincial and territorial governments (except Quebec)