Canadian Income Tax Explained

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Danielle Kubes is a trained journalist and investor who has written about personal finance for the past six years. Her writing has been published in The Globe and Mail, National Post, MoneySense, Vice and RateHub.ca. Danielle writes about investing and personal finance for Wealthsimple. She has a Bachelor of Humanities from Carleton University and a Master of Journalism from Ryerson University.

Canada’s taxes are as abundant as our lakes. There are taxes on consumption, such as sales tax, land transfer tax, liquor tax, gas tax, and custom tariffs on imported goods. Then there are taxes on assets, such as property taxes and car stickers. And finally, there’s a tax on income. Here’s what you need to know.

What is income tax?

For almost every dollar you earn you must pay a portion in taxes.

It wasn’t always this way. Before World War I Canada was a tax-free haven. Unlike England and the United States, Canada prided itself on its “no federal taxes” policy and used it to attract desperately needed skilled immigrants, investors, and capitalists. Instead, the government made money mostly by selling off natural resources and charging high custom fees on imported goods.

But in 1917, Finance Minister Sir Tomas White implemented the income tax act to pay for World War I and asked that it should be reviewed after the war. Canada has had an income tax ever since.

While 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, in 1917, single people had a personal exemption of $29,757 in today’s dollars, while married people had an exemption of $59,514. Over those amounts, they were taxed just 4%.

Now married and single people have identical federal personal exemptions, at around $13,230. The top federal tax rate is 33% and when we add in provincial tax rates, the total marginal tax rate now reaches 54%.

But we pay it without (much) complaint because it’s the price of living in a prosperous nation. As Oliver Wendell Holmes, the 19th century US Supreme Court Justice, said, “I hate paying taxes. But I love the civilization they give me.”

The Canadian Revenue Agency (CRA) collects this money to pay for the government’s operating expenses and delivery of services. Taxes are the reason we have the military, the police force, libraries, high schools, hospitals, roads, prisons, and the CBC. The government redistributes much of these taxes to low-income families and vulnerable Canadians in the form of child benefits, employment insurance, old age security, and social assistance.

How income tax works in Canada

You’re required to report your income to the CRA annually by filing paperwork known as a tax return. In this return, you must list all your income sources and note your eligibility for a tax deduction or tax credit.

The tax system is based on trust. Although the CRA does know about some of your income, they mostly rely on citizens to self-report their total income accurately.

The CRA recommends you file a return even if you do not earn any money. If you don’t file your taxes you may miss out on free money. Some payouts you may be eligible for include:

  • Child tax benefit

  • GST/HST credit

  • Guaranteed income supplement

The deadline to pay your income taxes

The deadline to pay taxes, for those who earn enough to do so, can be confusing because the date you must pay does not always line up with the date that you must file.

Employed individuals have the same payment and file date: April 30 (if this falls on a weekend, the tax deadline is the next business day). That’s because their taxes usually get taken off at the source, on each paycheque, so their tax calculation is simpler.

Self-employed individuals must pay any taxes owed in a tax year by April 30, but they have until June 15th to file their return.

The CRA charges a fee for late filers—5% of your balance owed plus an additional 1% for each month late (to a maximum of 12 months).

Income tax rates in Canada

Canada has a graduated or progressive tax system, which means the more you earn the more you pay.

Under this system, money is divided into income brackets which determine the applicable tax rate. A common mistake is to assume that all income is charged at the rate of its highest tax bracket. In fact, we are charged progressively, which means that first, 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’ll pay 10%. But on the second dollar, you’ll have to pay 20%. And on the third dollar, you’ll be on the hook for 30%. But you never have to pay 30% of $3. Instead, you paid a total of just $0.60 which works out to an average tax rate of just 20%.

Some find this graduated system fair, while others believe it burdens hard workers, penalises success, and discourages prosperity.

Corporations are the exception to this system, however. They pay a flat tax instead of a graduated tax. The corporate income tax, a flat tax for small, private Canadian corporations, for example maxes out at 15% (9% federal income tax rate plus up to an additional 6% provincially, no matter how much they earn).

Graduated tax rates can be confusing because the income tax brackets don’t depend just on the amount earned—they also depend on where the money comes from. Plus, each province has a completely different tax bracket. You must add the two together to come up with the total rate.

Some Canadians are surprised to learn that not all income is treated equally. The government typically gives a tax break to money earned from selling an investment—50% of the capital gains are taxed at the marginal tax rate which applies to their taxable income. And to encourage jobs and development, small Canadian corporations have extremely low tax rates. The highest tax rates are the personal income tax rates applied to wages and salaries.

The CRA differentiates between these six types of income sources:

  1. Other income (including employment and interest)

  2. Capital gains

  3. Eligible dividends (from large, public Canadian corporations)

  4. Ineligible dividends (from small Canadian corporations)

  5. General corporate income

  6. Small business corporate income

For example, let’s say you made $50,000 in employment income, and you live in Ontario. That’s in the second tax bracket both federally and provincially. The federal government charges you 15% on the first $49,020 you made, minus the federal exemption of $13,808, and then 20.5% on the remaining amount. Ontario charges 5.05% on the first $45,142, minus the provincial exemption of $10,880, and 9.15% on the remaining amount. That’s what we mean when we say that the more you make the more you pay.

Dividend money is considered to have already done its duty since it comes from after-tax corporate profit. Instead, you might also be eligible to receive a dividend tax credit which is a non-refundable tax credit meant to offset the effect of double taxing.

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’re required to pay duty on includes:

  • Employment income

  • Self-employment income minus expenses

  • Dividends

  • Interest

  • Income from selling stocks, bonds or an investment property

  • Pension income

  • Withdrawals from RRSPs

  • Foreign income

  • Corporate income minus expenses

Income exempt from taxes includes:

  • Most lottery winnings

  • Most inheritances and gifts

  • Child benefit payments

  • GST/HST credit

  • Payouts from a life insurance policy

  • School scholarships

  • Withdrawals from TFSA

  • Strike pay from a union

ProvinceTax Rate
British Columbia5.06% on the first $42,184 of taxable income
7.7% on the next $42,184 up to $84,369
10.5% on the next $84,369 up to $96,866
12.29% on the next $96,866 up to $117,623
14.7% on the next $117,623 up to $159,483
16.8% on the amount over $159,483 up to $222,420
Alberta10% on the first $131,220
12% on the next $131,221-$157,464
13% on the next $157,465-$209,952
14% on the next $209,953-$314,928
15% on the amount over $314,928
Saskatchewan10.5% on the first $45,677 of taxable income,
12.5% on $45,677 up to $130,506
14.5% on the amount over $130,506
Manitoba10.8% on the first $33,723 of taxable income
12.75% on the next $33,723 up to $72,885
17.4% on the amount over $72,885
Ontario5.05% 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 $150,001-$220,000
13.16 % on the amount over $220,000
Quebec15% on the first $45,105 of taxable income
20% on the next $45,105 up to $90,200
24% on the next $90,200 up to $109,755
25.75% on the amount over $109,755
New Brunswick9.68% on the first $43,835 of taxable income
14.82% on the next $43,835 up to $87,671
16.52% on the next $87,671 up to $142,534
17.84% on the next $142,534 up to $162,383
20.3% on the amount over $162,383
Nova Scotia8.79% on the first $29,590 of taxable income
14.95% on the next $29,591-$59,180
16.67% on the next $59,181-$93,000
17.5% on the next $93,001-$150,000
21% on the amount over $150,000
Prince Edward Island9.8% on the first $31,984 of taxable income
13.8% on the next 31,985 - $63,969
16.7% on the amount over $63,969
Newfoundland and Labrador8.7% on the first $38,081 of taxable income
14.5% on the next $38,081 up to $76,161
15.8% on the next $76,161 up to $135,973
17.3% on the next $135,973 up to $190,363
18.3% on the amount over $190,363
Nunavut4% on the first $46,740 of taxable income
7% on the next $46,740 up to $93,480
9% on the next $93,480 up to $151,978
11.5% on the amount over $151,978
Yukon6.4% on the first $49,020 of taxable income
9% on the next $49,020 up to $98,040
10.9% on the next $98,040 up to $151,978
12.8% on the next $151,978 - $500,000
15% on the amount over $500,000
Northwest Territories5.9% on the first $44,396 of taxable income
8.6% on the next $44,396 up to $88,796
12.2% on the next $88,796 up to $144,362
14.05% on the amount over $144,362

How to reduce your income tax

Paying what you owe in income taxes is a civic duty. But there’s no reason to pay a penny more than is required. Finding ways to reduce your taxable income is not only legal but financially responsible. Strategies to do so range from the simple and the common—maximise deductions—to the elaborate and the esoteric—like buying flow-through shares. Ultimately, a good accountant will be the best person to help find you tax efficiencies in your particular situation.

But here are a few ideas:

Change up your income sources: Our government gives some types of income preferential treatment. Employment income and interest bear the heaviest burden, while capital gains and dividends are barely touched. Instead of relying on a job and stashing funds in a savings account, many people try investing. If you can manage, over the long-term, to transfer surplus income from your salary into an investment portfolio you will be able to shelter much of your funds from taxes.

Move from sole-proprietorship to incorporation: If you’re a freelancer or have a small business, consider switching from a sole-proprietorship to a corporation. While incorporating comes with heavier compliance requirements and a trickier tax return, it could drop your tax rate significantly. In Ontario, for example, high earners would go from a marginal tax rate of 53.5% to just 13.5%. That’s only inside the corporation of course—once you transfer the funds and pay yourself a salary or dividend you’ll have to pay income taxes at regular marginal tax rates. This strategy will only save you on taxes if you make enough to be able to retain income inside the corporation. Speak with a professional accountant to see if your small business can benefit from this tactic.

Defer taxes: There’s a concept in financial planning that states that money today is always better than money tomorrow. So if there’s a way to put off paying taxes until tomorrow you should always take advantage of that opportunity. That’s because money can grow over time, and the more money you have the faster it can grow. Paying taxes impedes this process. The most obvious way to defer taxes is to stash funds and invest inside your RRSP. The money can grow sheltered from taxes until you withdraw funds in retirement. While eventually, you’ll have to pay the piper, your marginal tax rate will hopefully be lower than it is in your prime working years. You can do the same in your TFSA. Although you’re contributing with after-tax funds, the money once inside will also be able to grow free, away from the long reach of the CRA.

For investors and small business owners, a common way to defer taxes is to leave money inside a corporation for as long as possible. If you own an investment property you can write off the depreciation every year, which delays paying taxes until you actually sell the property.

As you can see, there’s still quite a bit of wiggle room in the tax code to postpone your tax obligations and put your money to better use.

Maximise all deductions: Deductions work by lowering your income, hopefully by enough to kick you down a tax bracket. Typical tax deductions include charitable donations, medical expenses, union dues, RRSP contributions, childcare expenses, and capital losses.

How to calculate income tax

Calculating your exact income tax is no easy task. Canada’s tax system is a warren of baffling codes, 1.1 million words long.

rough tax estimate can 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 (territorial, provincial and federal taxes).

To get an estimate of your total net income and income tax, use an online tax calculator.

How to pay income tax online

You can file longhand, the old-fashioned paper way, or through a free or paid service online. Many Canadians choose to outsource the work to an accountant.

You can pay tax by mailing a cheque, or by walking into any major bank with a cheque.

If you prefer to pay online you have three options:

  1. Pay through online banking. Simply set-up up the CRA as a bill payee through your bank

  2. Pay directly at the CRA with a debit card through “My Payment”

  3. Use a third-party service to pay with a credit card or PayPal.

Frequently Asked Questions

For 2022, the tax deadline is May 2. The deadline for filing taxes for most taxpayers is always April 30, unless that falls on a weekend, in which case the tax deadline becomes the next business day. The tax payment deadline is May 2, 2022, for employed and self-employed individuals.

The tax deducted from a paycheck depends on the tax brackets the taxpayer falls in, and the territorial or provincial, and federal income tax rates that apply to the taxpayer’s income. Along with taxes, the CPP amount and EI premiums are also deducted from a paycheck. For instance, if you live in Saskatchewan, and make $50,000 in a year, you’ll pay $11,386 in income taxes. But living in British Columbia, if you make $50,000 in a year your tax for the year will be $10,109.

Tax on Split Income (TOSI) refers to the tax on specific types of income of a child born in 2003 or later and income of an adult from a related business. Form T1206, Tax on Split Income provides information related to TOSI.

The CRA recommends you keep your tax records and supporting documents for at least six years.

The CRA can let you amend your tax returns for 10 previous years. So, if you are currently filing your 2021 tax return, you can amend tax returns back to 2011. You can request amendments to a tax return through the CRA’s “My Payment” or by mail. You can also use REFILE to update and resubmit tax returns for years 2018-2021.

If you make a mistake on your tax return, you can make adjustments to the same tax return in the following 3 ways:

Online: You can go to “My Account” to view your tax return and through “Change my return” request changes to the tax return.

ReFILE: If you filed the tax return electronically, you can use ReFILE to send adjustments to tax returns for 2018 and later years. You’ll also have to keep supporting documents with you, in case the CRA wants to see them.

By mail: You can make adjustments to a tax return by mail, however, the processing can take longer. You should fill out Form T1-ADJ, T1 Adjustment Request and attach all the supporting documents and send the change request to the CRA separate from your current year’s tax return if you are requesting a change to a previous year’s return.

If the foreign income earned outside Canada was taxed (in the country it was earned), there are tax treaties between Canada and foreign countries to avoid double taxing. Different kinds of foreign income are taxed differently. The rules of the treaties and several other factors help the CRA decide how much of your foreign income is tax-free.

If you want to outsource your tax preparation to a tax accountant, the cost for preparing a simple personal tax return starts at around $50. However, the cost for preparing tax returns for self-employed taxpayers’ starts at around $150. To optimise your return, you can use the free Wealthsimple Tax software to file taxes.

If you send your tax return by mail, getting a refund can take up to 8 weeks. Online taxpayers can expect to receive their tax refund in 2 weeks. If you have filed a non-resident personal income tax return and live outside Canada, your tax return can take up to 16 weeks. If the CRA selects your tax return for a detailed checking, refunds can take longer than usual.

You can claim federal and provincial or territorial non-refundable credits if you have donated an asset or money to a certain organisation. You can claim the entire amount or the eligible amount, up to 75% of your net income.

All cash gifts are tax-free in Canada. However, salary, tips, or gratuities received because of employment are taxable and must be reported on your tax return.

Failing to file a tax return is considered tax evasion and is therefore punishable through fine or imprisonment depending on the nature of the offence. If you file taxes but don’t pay taxes, a late filing penalty of 5% will be charged and an additional 1% for each month passed after the due date.

For filing taxes, you need to sort and organise the following:

  • Social insurance number and personal data

  • Income T-slips or RL-slips

  • The record of income (such as income statements if you are self-employed)

  • Receipts for a tax deduction (such as medical receipts to claim medical expenses)

  • Data from past years (such as RRSP contribution limit or repayments for Home Buyer’s Plan HBP)

  • Tax package sent to you by Canada Revenue Agency (CRA) or Agence du Revenue du Quebec (ARQ), including the access code

Last Updated April 13, 2022

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