In Canada, your tax level will depend on which province you live in as well as your income level. The Canadian Government provides its citizens with lots of benefits and services. The government collects your tax and returns them in the form of free health care, education, roads, highways, and other social benefits. And about 30% of federal government revenues are generated from personal income taxes.
Both provincial and federal governments levy income taxes, which, as the name implies, is a tax on your income. They also levy sales taxes or consumption. In Canada, you will encounter the Harmonized Sales Tax (HST), provincial sales taxes, and, in some provinces, the Goods and services tax (GST).
What Is Income Tax?
For almost every dollar you earn you must deposit some quota to the government.
It previously wasn’t like that. Before World War I, Canada was a tax-exempt country. Unlike the United States or England, Canada prided itself on its free tax regime and viewed it to attract desperately needed skilled immigrants, capitalists and investors. Instead, the federal government made money mostly by selling off natural resources and charging high custom fees on imported goods.
But in 1917, the finance minister Sir Tomas White instigated the income tax act to pay for World War I and asked that it should be reviewed after the war.
But once implemented, the government was unable to let go of this profitable and new stream of revenue and it has been like that till today.
As income tax may seem natural and inevitable to us today, it was met with resistance at the time and considered a significant burden. When income taxes were first introduced, single people had a personal exemption of $24,500 in today’s dollars, while married people had an exemption of $50,000. Over those amounts, they were taxed just 4%.
Presently, married and single people have identical federal personal exceptions, at around $13,230. The federal tax rate is 33% and when we add in provincial tax rates, the total marginal tax rate now reaches 53.53%.
In retrospect, 33% or 9 million Canadians pay no income tax at all. The milestone falls on 67% or 18.4 million Canadians who do. For them, income tax is likely one of the most expensive line items on their budget.
Collectively, taxes now contribute about $265 billion annually to the Canadian government, which makes up to 50% of its total revenue. Canadians pay it without complaint because it is part of their cost of living.
The Canadian Revenue Agency (CRA) collects this money to pay for the government’s delivery of services and operating expenses. Taxes are the major reasons we have the military, libraries, police force, roads, prisons, hospitals, and the CBC. The government also gives some of these taxes to lower-income Canadians in the form of employment insurance, old age security, child benefits, and social assistance.
How Income Tax Works In Canada
You are required to report your income to the Canadian Revenue Agency annually by filing a tax return. In this tax return, you are to list all your income sources and note your eligibility for any deduction of credits.
This tax system is formulated on trust. Although the CRA does not know about some of your income, they rely on citizens to report themselves their total income accurately.
Cheating on your taxes is very serious. The Canadian system would have collapsed if we didn’t all pay our taxes. Plus, the CRA is cracking down on grifters. It set aside $444.4 million over five years to help track down $2.6 billion in additional taxes it thinks have not yet been paid.
The CRA also recommends you a return even if you don’t earn money at all. They determine your eligibility for these redistribution schemes based on your tax returns. So if you don’t file your taxes, you are not eligible for these benefits.
The deadline for payment of taxes can be very confusing because the date you pay might not be the day you get to file. However, employed individuals get the same payment and file day because their taxes usually get taken off at the source, and so their tax calculation is quite simple.
Self-employed individuals are to pay any taxes owed by April 30th, but they have until June 15th to file their return. Large corporations are to pay any taxes owed two months after their year-end, while small Canadian businesses have three months after their year-end, but have until six months until their year-end to file their return.
The CRA charges a fee for late payments which is 5% of your balance owed plus an additional 1% for each month later.
Income Tax Rates In Canada
Canada has a progressive tax system- the more you earn, the more you pay. Under this system, money is divided into income brackets which determine the suitable tax rate. You might be thinking that income is charged at the rate of its highest tax brackets but instead, you pay the rate in the lowest bracket and only pay the higher rate on each additional dollar. This is also called your marginal tax rate.
For example, if you earn $1, you are expected to pay 10%. But on the second dollar you are to pay 20%, and on the third dollar, 30%. But you will never be asked to pay 30% of $3. Instead, you will pay a total of $0.60 which works out to an average rate of 20%.
Corporations are the exception to this system; however, they pay a flat tax instead of a graduated tax. The flat tax for small, private Canadian corporations, for example, maxes out at 15% (9% federal rate plus up to an additional 6% provincially, no matter how much they earn). Graduated tax rates can be confusing because the tax brackets don’t depend just on the amount earned but also depend on where the money comes from.
Some Canadians are stunned to learn that not all income is treated equally. To encourage economic growth, the government typically gives a tax break to money earned from selling an investment- capital gains are charged at half the normal rate. And to encourage jobs and development, small Canadian corporations have extremely low tax rates. The highest rates are applied to wages and salaries.
The Canadian Revenue Agency differentiates between these six types of income sources:
Ineligible dividends (from small Canadian corporations)
General corporate income
Eligible dividends (from large, public Canadian corporations)
Small business corporate income
Other income (including employment and interest)
Income That’s Not Taxable
Luckily, not all income is taxable. Here are some examples of income that is taxed in Canada.
Income that we are required to pay duty on includes:
Self-employment income minus expenses
Corporate income minus expenses
Income exempt from taxes includes:
Strike pay a union
Most lottery winnings
Most inheritances and gifts
Child benefit payments
The payoff from a life insurance policy
Withdrawals from TFSA
Provincial And Territorial Income Tax
Provinces / Territories Rates
Nova Scotia 8.79% on the first $29,590 of taxable income, +
14.95% on the next $29,590, +
16.67% on the next $33,820, +
17.5% on the next $57,000, +
21% on the amount over $150,000
Quebec 15% on the first $44,545 of taxable income, +
20% on the next $44,535, +
24% on the next $19,310, +
25.75% on the amount over $108,390
Newfoundland 8.7% on the first $37,929 of taxable income, +
And Labrador 14.5% on the next $37,929, +
15.8% on the next $59,574, +
17.3% on the next $54,172, +
18.3% on the amount over $189,604
New Brunswick 9.68% on the first $43,401 of taxable income, +
14.82% on the next $43,402, +
16.52% on the next $54,319, +
17.84% on the next $19,654, +
20.3% on the amount over $150,000
Prince Edward Island 9.8% on the first $31,984 of taxable income, +
13.8% on the next $31,985, +
16.7% on the amount over $189,604
Saskatchewan 10.5% on the first $45,225 of taxable income, +
12.5% on the next $38,775, +
17.4% on the amount over $72,164
Ontario 5.05% on the first $44,740 of taxable income, +
9.15% on the next $44,742, +
11.16% on the next $60,518, +
12.16% on the next $70,000, +
13.16% on the amount over $220,000
Alberta 10% on the first $131,220 of taxable income, +
12% on the next $26,244, +
13% on the next $52,498, +
14% on the next $104,976, +
15% on the amount over $314,928
Manitoba 10.8% on the first $33,389 of taxable income, +
12.75% on the next $38,775, +
17.4% on the amount over $72,164
Nunavut 4% on the first $46,277 of taxable income, +
7% on the next $46,278, +
9% on the next $57,918, +
11.5% on the amount over $150,473
British Columbia 5.06% on the first $41,725 of taxable income, +
7.7% on the next $41,726, +
10.5% on the next $12,361, +
12.29% on the next $20,532, +
14.7% on the next $41,404, +
16.8% on the amount over $157,748
Northwest Territories 5.9% on the first $43,957 of taxable income, +
8.6% on the next $43,959, +
12.2% on the next $349,527, +
15% on the amount over $500,000
Yukon 6.4% on the first $48,535 of taxable income, +
9% on the next $48,534, +
10.9% on the next $53,404, +
12.8% on the next $349,527, +
15% on the amount over $500,000
How To Reduce Your Income Tax
Paying your income taxes is a civic duty. But there is no reason to pay more than is required. Finding ways to reduce your taxable income is financially liable and legal.
The following are various ways you can reduce your income tax
1. Defer taxes
In financial planning, there is a concept that states that money today is always better than money tomorrow. So if you can put off paying taxes until tomorrow, that’s exactly what you should do. That’s because money grows over time, and the more money you have, the faster it can grow but paying taxes impedes this process.
The easiest way to defer taxes is to invest inside your RRSP. While for small business owners and investors, a common way to defer taxes is to leave money inside a corporation for as long as possible.
2. Maximize all deductions
Deductions work by lowering your income. Common deductions include medical expenses, childcare expenses, charitable donations, capital losses, and RRSP contributions.
3. Change up your income sources
Since the government gives us lots of benefits as said earlier, Employment income and interest bear the heaviest burden, while dividends and capital gains are barely affected.
So instead of relying on a job and putting all your income in a savings account, while not try investing it, and by doing, you will be able to shelter much of your funds from taxes.
How To Calculate Income Tax
Calculating your exact income tax can be very challenging. A rough estimate can easily be done by first figuring out your total income minus any applicable deductions. Then simply multiply your income, per source, by its suitable marginal tax rate.
To get an estimate use an online tax calculator.
How To Pay Income Tax Online
You can easily pay your income tax online using the following ways:
Pay through online banking. Simply set up the CRA as a bill payee through your bank.
Use a third-party service to pay with a credit card or PayPal.
Pay directly at the CRA with a debit card through “My Payment”.
Benefits Of Paying Income Tax Online
Generally speaking, as Canadians we accept the high tax rates due to the fact that we see the direct benefits of the tax dollars; especially through health services and public schools. It can also be discouraging when scandals occur with government officials mishandling their spending at the expense of taxpayers.
In general, Canada scores very well in terms of the Corruption Perception Index.
Thanks for reading, please let me know your thoughts and comments below.
Goods and Services Tax (GST) and the Harmonized Sales Tax (HST)
Sales tax, also known as consumption sales, is a tax on your purchases, that is, dining in a restaurant, shopping for new clothes, or buying mutual funds.
Whenever you purchase goods and services in Canada, this task is added to the cost of your purchase to get owing; the tax is not included in the price displayed on the sales tag.
Some basic items are exempted from sales taxes: basic groceries, for example, drug prescription, health, and dental services, child care, rent. Some items are “zero-rated”, such as most livestock, agricultural, and fishery products. They are prone to sales taxes but at a rate of 0%. Everything else is taxable.
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Sagar Sridhar is a personal finance blogger from Canada. His genuine passion for personal finance coupled with his unique style of writing is what stands out. Professionally, he is a computer engineer, agile certified and has a master’s degree in Project Management. His writing has been featured or quoted in the leading Canadian publications such as Credit Canada and many other personal finance publications. While he is juggling between his day job and blogging, he is the main author on this blog and has miles to go before making the final pit stop.