Canada’s Tax System
This can be especially tricky if a person’s pensions, investments, and so on are also impacted as a result of immigrating to a new country. In Canada, taxation is a complex but fair system; this article will offer a broad outline of the Canadian tax system and it will orient you with its key guide posts:
Under Canada’s federal system, taxes may be levied at three separate levels:
- Provincial, and
Because the requirements vary, where you choose to live in Canada will have an effect on how much you pay in taxes on your income, property, purchases, etc. This article describes these taxes below. Canada’s progressive income tax system means that wealthier residents pay a larger percentage of their income in taxes, while poor people pay little or none. However, the Fraser Institute, a conservative think tank, estimates that the average Canadian family earned CAN $124,659 in income in 2021 and paid an estimated $48,757 in taxes, or 39.1%. That figure includes income taxes as well as payroll taxes, sales taxes, property taxes and miscellaneous other taxes such as those levied on alcohol and gasoline. Tax Freedom Day, the day in the year when the average Canadian family earned enough to pay the taxes imposed on it, fell on May 24 in 2021. Not all experts agree with the accuracy of these figures, but there is no doubt that Canadians pay a substantial share in taxes to enjoy the many advantages of living in Canada.
Each level of government carries different responsibilities, which affects how the taxes at that level are collected and spent.
Let us begin at the federal level. Here, more than 25% of tax dollars are spent to support Canadian residents, particularly seniors (65 and older) and children. More than 15% goes to supporting seniors through programs such as Old Age Security, the Guaranteed Income Supplement (for low-income people) and support for surviving spouses. The federal government also spends about 7% on support for children, such as the Canada Child Benefit, as well as Employment Insurance income which provides support for maternity and parental leaves and for people with short-term disabilities.
Nearly 22 %is transferred to the provinces to help them pay for their responsibilities.
Another 29 % goes toward security and infrastructure spending, including the RCMP (Royal Canadian Mounted Police, Canada’s national police force), border patrol, prisons, and the Canada Revenue Agency (the tax agency). Canada’s spending on its military is relatively low compared with some nations: only about 8% of the federal budget is spent on military. Infrastructure spending includes more than 100 departments (such as Immigration, Citizenship and Refugees Canada), agencies and so-called Crown corporations such as Canada Post and the CBC (Canadian Broadcasting Corporation), which produces independent radio and television programming.
Each province carries its own set of responsibilities, the largest of which are education and health care, and therefore has its own system of income and sales taxes to support these needs.
Municipalities (cities, towns, regions and counties) take care of local infrastructure such as libraries, fire departments, local police, local roads, sewer and water systems, trash collection, etc., and raise money to pay for these mainly through property taxes.
With few exceptions, every resident of Canada, regardless of citizenship, is required to report and pay federal and provincial income taxes on their worldwide income, although people with income in more than one country may be protected from double taxation through one of Canada’s tax treaties. Sales taxes must be paid on most goods and services purchased in Canada (and sometimes on items you import personally), other than basic needs. Property owners generally must pay property taxes; for those renting a home, the cost of taxes is included in the monthly rent.
If you immigrate to Canada as a temporary resident or permanent resident (not merely a tourist or visitor), you are generally considered a resident for tax purposes from the day you arrive. However, in the first year there may be special rules to determine when you become eligible for various tax credits and benefits such as the Canada Child Benefit and the GST/HST tax credit. You can learn more about it here. You may have to file a tax return even if you only lived in Canada for a part of the first year, to determine your eligibility for these benefits.
There are three main types of taxes in Canada, described in more detail below, as well as two types of social security plan contributions that are deducted from wages as payroll taxes:
- Income taxes must be paid by both individuals and corporations. Individual income taxes make up nearly half (49%) of the overall tax burden in Canada. Corporate income taxes account for about 15%.
- Sales taxes: Canada levies a 5% Goods and Services Tax (GST) on most things purchased in Canada. This accounts for about 12% of the federal government’s income. On top of that, some provinces may levy their own sales taxes.
- Property taxes: These taxes on land and buildings are charged by the local municipality to cover the cost of everyday services. (Municipalities typically also receive some financial assistance from the provincial and federal governments, especially to finance capital projects.)
- Payroll Taxes: In addition, employees and their employers contribute to two important payroll taxes:
- Employment Insurance (EI): Contributions fund benefits to workers who become unemployed until they can find a new job. EI also pays benefits to employees taking maternity, parental, or other types of covered temporary leave.
- Canada Pension Plan (CPP): Contributions, paid half and half by the employer and employee, or fully by self-employed individuals, go into a pension fund that is invested and paid out monthly after retirement, usually starting at age 65.
Other revenues come from duties or tariffs imposed on certain imported goods, and a long list of miscellaneous taxes such as gasoline taxes, land transfer payments, health care taxes in some provinces, etc.
Personal Income Tax
Canadian residents can get information about their personal tax records, benefits and related information from the Canada Revenue Agency (tax department) through the My Account portal. Either is easy to access if you have an online account with one of 18 major Canadian banks and complete the multi-factor authentication.
Residents of Canada, citizens and non-citizens alike, need to fill out an income tax return once a year, a package that includes both federal and provincial taxes. There are many deductions and credits available to reduce the personal income tax payable, and provisions to deduct taxes paid to another country that has signed a tax treaty with Canada.
For most employed persons, it’s fairly simple to file the return, which must be done every year by April 30 for the preceding calendar year. Employers are required to deduct a proportionate amount of tax from each paycheck and distribute a statement (called a T4) by the end of February each year detailing the employee’s taxable earnings, benefits and taxes paid. Similar income and information slips are issued by financial institutions, pension plans, registered charities and other agencies and government departments to make this task easier and more accurate.
Tax return forms are available in paper form at post offices or through an online request, but the vast majority of people now choose to use tax software (such as TurboTax, H&R Block, or WealthsimpleTax) and file electronically through the government’s NETFILE system or pay a tax preparer to complete the forms. A community volunteer program is also available to help people complete their tax forms for free.
Even people who don’t have enough income to pay taxes should complete the tax form, as it may be necessary to file it to get certain payments they’re entitled to, such as the Canada Child Benefit, which provides an annual benefit of up to CAN $6,833 per child under age 6 and $5,765 per child aged 6 through 17.
Self-employed people may find it a bit more complicated to complete their tax forms, but they also receive additional deductions and credits for items such as the cost of running a home office, operating vehicles for their business, or buying equipment or tools for their business.
How can I reduce the amount of income tax I have to pay in Canada?
- People whose income mostly comes from employment often receive a refund after they file their return, because taxes that have already been taken out of their paycheck do not consider the wide variety of deductions and credits that are available to help reduce the amount of tax payable. These include deductions for age (over 65), dependents (under 18 or disabled), CPP, EI and company pension contributions, medical expenses, charitable or political contributions, union and professional dues, child care costs, employment expenses, university tuition, and many more. In addition to the many forms of federal tax relief, provinces often provide their own deductions for a variety of things, such as rebates for carbon taxes or property taxes. Thus, most employed persons receive a refund when they file their taxes and claim the various deductions.
- Canadian residents can also reduce their taxes by participating in a Registered Retirement Savings Plan (RRSP) program, which offers a way to save up to a certain percentage of your earnings in a tax-sheltered retirement plan, from which you can subsequently withdraw funds at a lower tax rate in retirement or for certain specific purposes such as buying a home. (Some employers even contribute to an employee’s RRSP.)
- One more way to reduce income tax on investments is to start a registered Tax Free Savings Account (TFSA). This can be anything from a simple savings account or any combination of registered investments, for example in guaranteed investment certificates or mutual funds. Income saved or invested within a TFSA has already been taxed, but any profit or interest you earn within a TFSA is not taxed. People 18 and older can contribute up to a fixed amount each year (currently CAN $6000) and this amount can be carried over, so if you aren’t able to start contributing for a few years after you immigrate to Canada, you can catch up at a later date. Furthermore, you don’t need to wait until retirement to withdraw the money.
Corporate Income Tax
Businesses can stay in touch with the Canada Revenue Agency (CRA) using My Business Account, a secure online portal that allows 24-hour electronic interaction on all tax issues (except accounts administered by Revenu Québec), involving GST/HST, payroll taxes, income taxes, and excise taxes and duties.
Most resident corporations (except Crown corporations and registered charities), including nonprofits, tax-exempt and inactive ones, must file a corporation income tax (T2) return every tax year even if there is no tax payable. The filing date is three months after the end of the company’s fiscal year, whenever that occurs. Most corporations file electronically, electronic filing is mandatory for companies with annual gross revenues of CAN $1 million or more.
Non-resident corporations have to file a T2 return if they conducted any business in Canada, had a taxable capital gain or disposed of taxable Canadian property during the year—even if any profit or gain might be tax-exempt under a tax treaty.
There are several types of corporations in Canada for tax purposes, and the type of corporation determines whether it is eligible for certain reduced tax rates and deductions. The types are:
- Canadian-controlled private corporation (CCPC)
- Other private corporation
- Public corporation
- Corporation controlled by a public corporation
- Other corporation
The federal base corporate income tax rate in Canada is 38%, but this can be reduced considerably by using various incentives. A federal tax abatement equal to 10% of taxable income earned in the year is available if it was earned in a Canadian province or territory (income earned outside Canada is not eligible). A general tax reduction applicable to many companies reduces the effective rate to 15%.
Corporations that earn at least 10% of gross revenue from manufacturing or processing goods in Canada for sale or lease can claim a manufacturing and processing profits deduction that reduces tax payable to a rate of 13%.
A wide variety of tax credits are also available to further ease the corporate tax burden. These include special credits for film and video production, journalistic enterprises, logging, involvement in certain environmental reclamation projects, and investment in scientific research and experimental development.
Sales tax is payable on most goods and services, with exceptions for basic necessities such as groceries (but not food served in a restaurant!), prescription drugs, medical services, rent, day care, financial services, etc. This is a flow-through tax, meaning that sellers of goods and services charge the tax at point of sale and remit it to the government.
Companies are required to obtain a GST/HST account number and start charging these taxes if they sell taxable supplies, leases or other supplies in Canada and gross at least CAN $30,000 in such sales worldwide within a period of four quarters. Only goods and services sold in Canada are actually taxed, however. Companies that charge GST/HST can also claim a tax credit for tax paid on goods and services they purchase to carry on their business. Thus, GST/HST acts like a value added tax.
Interesting fact: Alberta and the three northern territories (Yukon, Nunavut, Northwest Territories) do not have a provincial sales tax. Elsewhere, you can expect to see anywhere from 6% to 10% more added to your bill.
Taxes paid on property are the main source of income for municipalities — cities, towns, counties, regional governments, etc. — who operate and maintain everyday services such as fire and ambulance services, libraries, recreation centers, water and sewer systems, garbage collection, local roads and bridges, public health agencies, social housing, and often local police services.
Owners of houses, business buildings, condominium apartments, farms and other kinds of property are billed automatically by the municipality, usually with an opportunity to spread out payments over the year. If you are renting a home, the owner pays the tax on the building and passes on a portion to you in your monthly rent. How much you will pay depends on the assessed value of the property, the type of services provided in your community, the rate charged in your community, and whether your property is valued higher or lower than those of your neighbors.
Depending on the province, taxes to help pay for elementary and secondary schools may also appear as part of the property tax bill.
- Employment Insurance: This tax is collected from employees and employers to provide benefits to people who become unemployed for reasons beyond their control, to support them while they seek new employment or wait to be recalled to a job from which they were laid off. The rate for this tax in 2022 is CAN $1.58 per $100 earned, up to an annual maximum of $952.74.
Insured workers can receive up to $638 per week while they are unemployed and must be actively seeking work to continue getting benefits. Various rules apply depending on the type of work done and minimum period of work to be eligible. Support can last anywhere from 14 weeks to 45 weeks, depending on the field of work and current employment rates in the region.
Note that the EI system also administers benefits to people who are on leave for reasons of illness, maternity or parental leave, or caring for a critically ill or injured family member.
A special program for self-employed people allows them to voluntarily contribute to the plan and enjoy these benefits, but not the regular out-of-work payments.
- Canada Pension Plan: CPP is a self-funded pension plan to which all Canadian employees and their employers contribute. Since not all companies provide a pension for their workers, CPP ensures that every Canadian worker has at least some financial support when they are disabled or retired, in addition to the Old Age Security (OAS) pension, which is funded from the general tax base.
CPP premiums and benefits adjust upward each year. For 2022, the rate paid by the employer and employees is expected to be 5.7% of pensionable earnings, up to a maximum salary of CAN $61,400. An employee earning that amount will have about $3,500 deducted from their paychecks; a self-employed person will have to pay $7,000 for this tax. Income above $61,400 is not subject to this tax.
Regular retirement benefits normally start at age 65 but can begin as early as 60 or as late as 70 with adjustments. The basic maximum benefit in 2022 is CAN $8400 per year, with additional amounts for disability and post-65 contributions. CPP benefits can also be paid to surviving spouses and dependants, and a death benefit is paid to help with funeral expenses.
Governments in Canada often collect revenues through other taxes that are not directly evident to consumers. Often these taxes have a secondary objective such as promoting a cleaner environment, boosting the economy, or discouraging unhealthy habits. These include excise taxes on gasoline, diesel, and inefficient vehicles, as well as taxes on alcohol and tobacco, which are built into the price of these products.
Tourists are charged a special hotel tax and a security tax on air travel. Tariffs and duties are charged on the import of certain goods from certain countries, partially to protect the Canadian economy against cheaper imports. Property transfer taxes or fees (typically 1-2% of the value) are charged in some provinces on the purchase of new properties. A few taxes specifically target foreigners, such as Ontario’s Non-Resident Speculation Tax, which, in an effort to ease a shortage of affordable housing, imposes a 15% tax on some properties purchased by non-permanent residents or companies who don’t occupy the property within 60 days.
Canada has concluded tax treaties with dozens of other countries in an effort to avoid both — tax evasion and double taxation. That means that, while residents of Canada must declare all of their worldwide income on their tax returns, most or all of foreign taxes paid may be deducted from what is owed in Canada.
When completing your Canadian income tax return, you simply claim a credit for any foreign tax you have paid on your income (assuming that country has a tax treaty with Canada) by converting the amount of your foreign income and tax to Canadian currency, using the exchange rate published by the Bank of Canada.
Tax treaties, or conventions, define which taxes are covered, and who is considered a resident and therefore eligible for benefits. They often reduce the amount of tax to be withheld from interest, dividends, and royalties paid by a resident of one country to a resident of another, and define circumstances in which income earned in one country may be taxed in the other one, including salary, self-employment, pension, and other income. If you have any source of income in your home country, it’s a good idea to learn more about the treaty your home country may have with Canada to understand your tax obligations and liabilities. You can find a list of links to these treaties here.
If you are a resident of Canada and are wondering how your foreign-source income will be taxed in Canada, or are a non-resident of Canada with questions about how your Canadian source income will be taxed in Canada, you can also contact Canada’s International Tax Services Office.
It’s worth noting that Canada has also signed social security agreements with more than 50 countries that allow people who have worked in more than one country to harmonize their pension programs to avoid paying twice or losing important benefits.