Income Tax

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Income Tax

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:

  1. deduction at source – where income tax is deducted directly from an individual’s pay and sent to the CRA.
  2. 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.
  3. payment on filing – payments made with the income tax return
  4. 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.

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 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).

The Income Tax Rates in Canada for 2012

These are the rates that an individual will use when completing their 2012 income tax and benefit return. The information may change during the year to reflect updates to the law.

Federal tax rates for 2012

  • 15% on the first $42,707 of taxable income, +
  • 22% on the next $42,707 of taxable income (on the portion of taxable income over $42,707 up to $85,414), +
  • 26% on the next $46,992 of taxable income (on the portion of taxable income over $85,414 up to $132,406), +
  • 29% of taxable income over $132,406.

Ontario tax rates for 2012

  • 5.05% on the first $39,020 of taxable income, +
  • 9.15% on the next $39,023, +
  • 11.16% on the amount over $78,043

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. Effective January 1, 2010, the tax rate on the first tax bracket was cut by one percentage point, from 6.05% to 5.05%. 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
  • ON-BEN Application for the 2011 Ontario Senior Homeowners’ Property Tax Grant, the 2011 Ontario Energy and Property Tax Credit, and the 2011 Northern Ontario Energy Credit

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.

Non-refundable tax credits: Ontario has its own non-refundable tax credits similar to federal non-refundable tax credits, although the amounts may differ. For example – Adoption Tax Credit, Disability Tax Credit, and Caregiver Tax Credit. The rules for claiming these credits are the same as the rules for the federal tax credits. You claim the non-refundable tax credits on your ON428 Ontario Tax form.

  • Ontario Child Benefit: maximum per child under age 18 – $1,100 for 2012; benefit reduction threshold, 8% reduction over$20,000
  • Ontario Senior Homeowners’ Property Tax Grant: maximum per senior or senior couple – $500 for 2012; benefit reduction threshold for single seniors, 3.33% reduction over $35,000; Benefit reduction threshold for senior couples, 3.33% reduction over $45,000
  • Ontario Sales Tax Credit – maximum amount per individual $273 for 2012

Refundable tax credits: These credits give you a refund, even if you do not owe any Ontario tax. Refundable tax credits include:

  • The Ontario Energy and Property Tax Credit – If you pay rent or property tax, you could get up to $$946 for 2012 to help with the sales tax you pay on energy and the property taxes you paid. Qualifying seniors can get up to $1,078 for 2012. These amounts will be adjusted for inflation each year. Effective July 2012, payments of the Ontario Sales Tax Credit, Ontario Energy and Property Tax Credit and Northern Ontario Energy Credit will be combined into a single benefit payment called the Ontario Trillium Benefit and delivered on a monthly basis.
  • The Ontario Children’s Activity Tax Credit – If you have a child enrolled in activities, such as painting classes, soccer, hockey or music lessons, you can claim up to $526 in eligible expenses and get up to $52.60 back for each child under 16 for 2012. You can receive up to $105.20 back for a child with a disability who is under 18. These amounts will be adjusted for inflation each subsequent year.
  • The Ontario Political Contribution Tax Credit – The Political Contribution Tax Credit encourages people to participate in the provincial political process. The credit is provided on behalf of Ontario through the personal income tax system. A refund may result if the total Ontario tax credits exceed the tax owing on your tax return. The amount of the credit depends on the total you contribute in each tax year. You may claim a maximum tax credit of up to $1,240 a year. You will reach this limit when your eligible political contributions total $2,821. For example, annually you may claim 75% of the first $372 of your political contribution in the year; plus 50% of the next $868; plus 33 13 % of an amount exceeding $1,240, but not more than $2,821.

You claim these refundable tax credits on your ON479 Ontario Credits form. To be eligible to claim Ontario Tax Credits you must:

  • be an Ontario resident
  • have lived in Ontario on December 31
  • file a federal income tax return for that year

If you have a spouse or common-law partner, there are special conditions which apply to each Ontario Tax Credit.

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.

Deceased Persons

If you are the legal representative (the executor, administrator, or liquidator) of the estate of an individual who died in 2011, you may have to file a return for 2011 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 2011.

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: www.cra-arc.gc.ca/ You can also take a copy at any post office.

To obtain a copy of your notice of assessment or reassessment

By using My Account (http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html ), you can view and print detailed information on a particular assessment or reassessment to your income tax and benefit return for the current year or the 11 prior years.

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:

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. 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.

Basic Corporate Income Tax (CIT) Rates

The Ontario basic income tax rate is 12%, effective July 1, 2010 (it was previously 14%). It will be reduced as follows:

  • 11.5% effective July 1, 2011;
  • 11% effective July 1, 2012;
  • 10% effective July 1, 2013.

The tax is prorated based on the number of days in the year when the tax year straddles these dates.

The Ontario small business deduction reduces Ontario basic income tax by 8.5%, resulting in a lower tax rate of 5.5%. This tax rate was reduced to 4.5% effective July 1, 2010.

The Ontario transitional tax debits and credits provide a transition from the Corporations Tax Act (Ontario) for corporations with different income tax attributes for federal and Ontario purposes.

Ontario harmonized return

The harmonized return will include the following Ontario corporation taxes:

ONTARIO TAX CREDITS

Ontario offers different tax credits. Details of each credit can be found in the following page:  https://www.ontario.ca/page/ontario-tax-credits-and-benefits

  • Apprenticeship training tax credit
  • Business-research institute tax credit
  • Capital gains refund
  • Co-operative education tax credit
  • Corporate minimum tax credit
  • Credit union tax reduction
  • Foreign tax credit
  • Innovation tax credit
  • Political contributions tax credit
  • Qualifying environmental trust tax credit
  • Refundable media tax credits
    • Book publishing tax credit
    • Computer animation and special effects tax credit
    • Interactive digital media tax credit
    • Film and television tax credit
    • Production services tax credit
    • Sound recording tax credit
  • Research and development tax credit
  • Resource tax credit
  • Tax credit for manufacturing and processing

CUTS TO BUSINESS TAXES

Ontario is providing over $4.8 billion in tax relief over three years, including Corporate Income Tax (CIT) cuts starting July 1, 2010:

  • The general statutory CIT rate was lowered to 12% from 14% and will be further reduced to 10% by 2013
  • The CIT rate on taxable income from manufacturing and processing, mining, logging, farming and fishing was lowered to 10% from 12%
  • The small business CIT rate was cut to 4.5% from 5.5%
  • The small business deduction surtax was eliminated
  • More small- and medium-sized businesses are exempt from the Corporate Minimum Tax, and the rate was cut to 2.7% from 4%.

This is in addition to eliminating the capital tax. Capital tax was already eliminated for firms primarily engaged in manufacturing and resource activities in 2007. For all other businesses, capital tax rates were cut by 33% on January 1, 2010 and then capital tax was completely eliminated on July 1, 2010.

Reduced Business Costs

  • Most businesses receive input tax credits for sales tax they pay on many of their purchases and capital investments, providing significant savings.
  • The HST will result in the removal of about $4.5 billion a year in embedded sales taxes, when fully phased in.
  • Businesses also save from the elimination of embedded tax in supplier prices.
  • Harmonizing our tax systems means one set of forms, one point of contact and savings of more than $500 million annually in compliance costs.
References:
  • Ontario Ministry of Finance website
  • Canada Revenue Agency (CRA) website
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