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. The government made money mostly by selling off natural resources and charging high custom fees on imported goods.
But in 1917, Finance Minister Sir William Thomas 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 $15,000. The top federal tax rate is 33%, and when we add in provincial tax rates, the total marginal tax rate now reaches 54.8%.
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 U.S. Supreme Court Justice, said, “I hate paying taxes. But I love the civilization they give me.”
The Canada Revenue Agency (CRA) collects this money to pay for the government’s operating expenses and delivery of services. Taxes are the reason we have hospitals, high schools, the military, the police force, libraries, 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 tax deductions or tax credits.
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:
Canada Child 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 15 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 pay 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 business Canadian-controlled private corporations, for example, maxes out at 12.20% (9% federal income tax rate plus up to an additional 3.20% provincially/territorially, 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:
Other income (including employment and interest)
Capital gains
Eligible dividends (from large, public Canadian corporations)
Ineligible dividends (from small Canadian corporations)
General corporate income
Small business corporate income
For example, let’s say you made $55,000 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 $53,359 you made, and then 20.5% on the remaining amount. Ontario charges 5.05% on the first $49,231 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 nonrefundable 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 not taxed in Canada:
Most lottery winnings
Most inheritances and gifts
Canada Child Benefit payments
GST/HST credit payments
Payouts from a life insurance policy
School scholarships
Withdrawals from a Tax-Free Savings Account (TFSA)
Strike pay from a union
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 esoteric — like buying flow-through shares. Many tax preparation programs can help you find the deductions and credits you qualify for. For truly complex and unique situations, a good accountant will be the best person to help find the optimal 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 46.16% to just 12.2%. 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 Registered Retirement Savings Plan (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. A newly introduced tax deferral option is the First Home Savings Account (FHSA), which allows you to save up to $40,000 for the purchase of your first home. Like the TFSA, the money, once inside the FHSA, can grow tax-free.
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. Credits work by lowering your tax payable, hopefully down to zero. Typical tax deductions include union dues, RRSP contributions, child care expenses, and capital losses. Typical tax credits include charitable donations, medical expenses, caregiver amounts, and the Canada Workers Benefit.
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.
A 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
With income sources such as employment income, income tax is deducted from your income and remitted to the CRA throughout the year. With other sources such as self-employment income, income tax is required to be paid quarterly to the CRA. If after preparing and filing your tax return and all income has been accounted for it's determined that you still owe some tax money, you have to pay that amount owed to the CRA by the payment deadline — April 30 of the following year.
You can file your tax return longhand, the old-fashioned paper way, or through a free or paid service online. Some 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:
Pay through online banking. Simply set up the CRA as a bill payee.
Pay directly at the CRA with a debit card through “My Payment.”
Use a third-party service to pay with a credit card or PayPal.
Frequently Asked Questions
The tax payment deadline is April 30, for both employed and self-employed individuals unless it falls on a weekend, in which case the payment deadline becomes the next business day. The filing deadline if you or your spouse is self-employed is June 15.
The tax deducted from a paycheque depends on the tax brackets the income falls in, and the territorial or provincial and federal income tax rates that apply to the taxpayer’s income. Along with income tax, the CPP amount and EI premiums are also deducted from a paycheque. For instance, if you live in Saskatchewan and make $50,000 in a year, you’ll pay $12,755.60 in income taxes. But living in British Columbia, if you make $50,000 in a year, your tax for the year will be $10,144.73.
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 Canada Revenue Agency (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 2023 tax return, you can amend tax returns back to 2013. You can request amendments to a tax return through the CRA’s “Change my return” service or by filling out and mailing a paper T1ADJ form. You can also use ReFILE to update and resubmit tax returns for the current tax year and certain previous tax years.
If you make a mistake on your tax return, you can make adjustments to the same tax return in the following three 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 via NETFILE, you can use ReFILE to send adjustments to current tax year returns and certain previous tax 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 file your return by mail, processing of your tax return can take up to eight weeks. Taxpayers who file online can expect their return to be processed in up to two weeks. If you’ve signed up for direct deposit, you can expect to receive your refund within these timelines. If you receive your refund as a cheque by mail, additional time should be added to these timelines for the time it takes your cheque to get to you through the postal service. If you have filed a non-resident personal income tax return and live outside Canada, your tax return can take up to 16 weeks to be processed. If the CRA selects your tax return for a detailed review, processing and refunds can take longer than usual.
You can claim federal and provincial or territorial nonrefundable credits if you have donated an asset or money to certain organisations. 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, salaries, 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 your tax return late and are in an amount owing situation, a late-filing penalty of 5% will be charged and an additional 1% for each month passed after the due date. Also, until you pay the amount you owe, the CRA will charge daily compound interest on the amount owed until it’s paid.
For filing taxes, you need to sort and organise the following:
- Social insurance number and personal data
- Income T-slips and, if you’re a resident of Québec, RL-slips
- The record of income (such as income statements if you are self-employed)
- Receipts for tax deductions and credits (such as medical receipts to claim medical expenses)
- Your notice of assessment from the previous year’s tax return. This provides you with data such as your Registered Retirement Savings Plan contribution limit or repayment amount for Home Buyers’ Plan or Lifelong Learning Plan and access code.
Last Updated January 29, 2024
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