Income taxes in Canada constitute the majority of the annual revenues of the Government of Canada, and of the Provincial governments. Canada’s federal income tax system is administered by the Canada Revenue Agency (CRA). 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. In the last fiscal year, the government collected roughly three times more personal income taxes than it did corporate income taxes.
GENERAL INFO ABOUT CANADIAN INCOME TAX SYSTEM
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.
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.
Again, Canadian Individual tax returns for any specific year must be filed by April 30 of the following year. There is no provision for generally extending this deadline, but there are a few exceptions:
- Tax returns for self-employed individuals and their spouses must be filed by June 15 of the following year. However, any GST/HST owing for the period is due April 30.
- Tax returns for deceased individuals must be filed by the normal filing deadline or 6 months after the date of death, whichever comes later. Example: Mary dies on January 30, 2004; Her 2003 return is due on July 30, 2004 (six months later) and her 2004 return is due on April 30, 2005 (normal filing deadline). This provision is also extended to the surviving spouse.
- Tax returns for non-residents electing to file under section 217 are due June 30 of the following year.
- By virtue of the Interpretation Act the due date of all individual returns is moved to the next business day when the normal due date falls on a Sunday or Holiday. Although ministerial orders are also used to apply this to Saturday due dates, it is not a legal requirement.
The Federal Finance Minister may extend the deadline in cases of emergency situations such as floods, etc. When a due date falls on a Saturday, a Sunday, or a public holiday, CRA considers your payment to be paid on time or your return to be filed on time, if CRA receives it or if it is postmarked on the next business day.
Canadian federal tax returns are filed with the Canada Revenue Agency.
In addition, the return plays a role in voter registration by including a checkbox asking if the signee if they are willing to have their personal contact information included on a national voter registry which is accessible by Elections Canada and its provincial equivalents.
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 return
- arrears payments – payments made after the return is filed
Employers may also deduct Canada Pension Plan (CPP) 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, you should keep your supporting documents for 6 years. Have the receipts and documentation to support your claims ready in case you are selected for review.
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 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 Pension Plan contributions, Employment Insurance premiums, disabilities, tuition and education and medical expenses. These credits are calculated by multiplying the credit amount 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.
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 Nations, if situated on a reserve;
- capital gain on the sale of a taxpayer’s principal residence;
- Ontario child tax credits or benefits;
- Working income tax benefit;
- the Goods and Services Tax or Harmonized Sales Tax credit (GST/HST credit);
- the Canada Child Tax Benefit;
- most amounts received from a Tax-Free Savings Account (TFSA)
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).
Federal tax rates for 2021
- 15% on the first $49,020 of taxable income, plus
- 20.5% on the next$49,020 of taxable income (on the portion of taxable income over 49,020 up to $98,040), plus
- 26% on the next$53,939 of taxable income (on the portion of taxable income over $98,040 up to $151,978), plus
- 29% on the next $64,533 of taxable income (on the portion of taxable income over 151,978 up to $216,511), plus
- 33% of taxable income over$216,511
Ontario tax rates for 2021
- 5.05% on the first $45,142 of taxable income
- 9.15% on the next $45,142 up to $90,287
- 11.16% on the next $90,287 up to $150,000
- 12.16% on the next $150,000 up to $220,000
- 13.16 % on the amount over $220,000
Ontario tax is the provincial portion of your personal income taxes. It is calculated separately from your federal income tax, and is based on your income tax bracket.
Ontario tax also includes the Ontario Health Premium. The Ontario Health Premium is deducted from employee pay and pension cheques through the personal income tax system. The actual amount of the Ontario Health Premium for the year is determined when you file your annual income tax return. Self-employed individuals who remit tax by installments must include an estimated amount for the Ontario Health Premium. The Ontario Health Premium is not related to the Employer Health Tax for Ontario. Each year, revenue from the Ontario Health Premium contributes approximately $2.8 billion to the health care system.
For people living in Ontario, three Ontario forms are of interest as part of your federal (T1) income tax return:
- ON428 Ontario Tax
- ON479 Ontario Credits
Ontario Tax Credits
You can reduce the amount of Ontario tax you pay by claiming tax credits when you file your income tax return. Ontario Tax Credits provide tax relief for people with low- to middle-incomes. There are two types of credits: non-refundable tax credits and refundable tax credits.
- Ontario Child Benefit
- Ontario Guaranteed Annual Income System (GAINS)
- Ontario Senior Homeowners’ Property Tax Grant
- Ontario Trillium Benefit
Refundable Tax Credits
The following refundable tax credits help reduce or eliminate the amount of tax you owe. Excess credits may be paid as a refund after your personal income tax return is assessed — even if you pay no income tax.
- Ontario Child Care Tax Credit
(Ontario Childcare Access and Relief from Expenses (CARE) Tax Credit)
- Ontario Focused Flow-Through Share Tax Credit
- Ontario Seniors’ Public Transit Tax Credit
- Political Contribution Tax Credit
- Seniors’ Home Safety Tax Credit
The three credits listed below are based on information reported on your previous year’s income tax return. These credits are combined and paid as the Ontario Trillium Benefit.
- Northern Ontario Energy Credit
- Ontario Energy and Property Tax Credit
- Ontario Sales Tax Credit
To apply for these tax credits and benefits, complete forms ON479 Ontario Credits and ON-BEN.
Non-refundable Tax Credits
Non-refundable tax credits help you reduce or eliminate the amount of income tax you owe. Excess non-refundable credits do not create a tax refund.
Most Ontario non-refundable tax credits are similar to federal non-refundable tax credits, although the amounts may differ. The rules for claiming these credits are the same as the rules for the federal tax credits.
Non-refundable tax credits are claimed on your ON428 Ontario Tax form and explained in your income tax package.
You can also read about the following credits:
- Community Food Program Donation Tax Credit
- Community Small Business Investment Fund Program
- Dividend Tax Credit
- Labour Sponsored Investment Funds Program
- Low-Income Workers Tax Credit
(Low-income Individuals and Families (LIFT) Tax Credit)
- Ontario Tax Reduction
Other Ontario Programs
- Ontario Electricity Support Program
- Ontario Opportunities Fund
View other government benefit programs for Ontario residents
Interest and Penalties
If you have a balance owing for the previous year by April 30, CRA will charge compound daily interest starting from May 1 of the current year. In addition, they will charge you interest on the penalties starting the day after your return is due. The rate of interest they charge can change every three months. If you fail to report an amount on your return for 2011 and you also failed to report an amount on your return for 2008, 2009, or 2010, you may have to pay a federal and Ontario repeated failure to report income penalty. You may have to pay a penalty if you, knowingly or under circumstances amounting to gross negligence, have made a false statement or omission on your income tax return.
If you are the legal representative (the executor, administrator, or liquidator) of the estate of an individual who died, you may have to file a return for the last year for that individual. For more information about your filing requirements and options, and to know what documents are required, see Guide T4011, Preparing Returns for Deceased Persons. The due date for the final return will depend on the date of death and whether or not the deceased or his or her spouse or common-law partner carried on a business in the last year.
To obtain a copy of the income tax return
To obtain a copy of the return you may contact the Canada Revenue Agency (CRA) at 1-800-959-2221 or visit the Canada Revenue Agency (CRA) website: You can also take a copy at any post office.
CORPORATE INCOME TAXES
The Canada Revenue Agency (CRA) administers Ontario’s corporate income tax, capital tax, corporate minimum tax, and the special additional tax on life insurers. 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, and Workers’ Compensation); property taxes; and indirect taxes.
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:
Canadian-controlled private corporation
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.
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.
Basic Corporate Income Tax (CIT) Rates for 2021
The basic rate of Part I tax is 38% of your taxable income, 28% after federal tax abatement. After the general tax reduction, the net tax rate is 15%. For Canadian-controlled private corporations claiming the small business deduction, the net tax rate is: 9% effective January 1, 2019.References:
- Ontario Ministry of Finance
- Canada Revenue Agency (CRA)
Last updated: January 2021