Income tax in Canada

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 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 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. Donations can result in a reduction in taxes of between 40 and 60% of the donation depending on the province of the taxpayer and 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.

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.[6] Individuals in Canada generally pay income taxes on employment and investment income to the province in which they reside on December 31 of the tax year. This ensures that taxpayers who live in one province and work in another, or who move from one province to another in most cases only have to file a tax return for one province. Individuals with business income have to pay tax on the business income to the province in which it was earned. If it was earned in more than one province, it is allocated based on a formula in the Income Tax Regulations. In addition to the income tax levied as a percentage of taxable income, two provinces, Prince Edward Island and Ontario, levy surtaxes as a percentage of tax over a certain threshold.

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.

Quebec chooses to receive part of its health and social transfers in tax points instead of cash. To compensate for this, federal personal income taxes on income earned in Quebec are reduced by 16.5% of federal tax. This is referred to as the Quebec Abatement. [7]

The following historical federal marginal tax rates 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 2018 are publicly available.[8] Data on basic personal amounts (personal exemption taxed at 0%) can be found on a year by year basis is also available.[9] 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. The personal exemption is listed as it always applies. Additional deductions may be applied depending on eligibility, see.[10] The most common additional deductions are Canada Pension Plan (CPP), Employment Insurance (EI) and employment credit. Exempt amounts are calculated, multiplied by the lowest tax rate and the result is tax credits that reduce the total amount of tax owed.

The following types of income are not taxed in Canada (this list is not exhaustive):

• gifts and inheritances;
• death benefits paid from a life insurance policy;
• lottery winnings;
• winnings from betting or gambling for simple recreation or enjoyment;
• strike pay;
• income earned within a Tax-Free Savings Account;
• 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 Nations, 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 Tax or Harmonized Sales Tax credit (GST/HST credit), Quebec Sales Tax credit or Saskatchewan Sales Tax Credit;
• the Canada Child Tax Benefit.

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 (RRSP) 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 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 changed its rules in 2004 and, legally, this may be taxed or may not – Courts have yet to rule.

The taxes payable by a Canadian resident corporation depend on 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.

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.