Income taxes in Canada constitute the majority of the annual revenues of the Government of Canada, and of the governments of the Provinces of Canada. In the fiscal year ending 31 March 2015, the federal government collected nearly three and a half times more revenue from personal income taxes then it did from corporate income taxes.
Tax collection agreements enable different governments to levy taxes through a single administration and collection agency.
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.
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. The penalty for filing late is 5% of your current balance owing, plus 1% of your balance owing for each full month your return is late, to a maximum of 12 months. It is also the obligation of your employer to send you a T4 slip for filing by February 28th. Make sure to ensure that if you change jobs throughout the year that your employer has your current address so you can avoid any delays.
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
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 needs to only make 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.
The effective tax rate (ETR) for individuals is the average rate at which their earned income is taxed.
For an individual: ETR = Total Tax Expense ÷ Taxable Income
Using the above rates the effective tax rate (for the federal income tax) of someone who earned $55,000 in income is:
($46,605 x 15%) + (($55,000-$46,605) x 20.5%)) = $8,711.73 in Total Tax Expense
Therefore the total effective tax rate is $8,711.73 ÷ $55,000 = 15.84% ETR
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)
- the Canada Child Tax Benefit.
*We will discuss RRSP's in the "Finance & Investments" course.
There are several ways to file your taxes. There is no wrong answer when it comes to doing this, however your comfort level, the complicity of your tax situation and financial cost are all potential factors. You can complete taxes individually in hard copy, the CRA online service or another online software. You can also have a professional complete your taxes for you. In this case a bookkeeper or an accountant can file your taxes on your behalf. Fees vary widely based on your situation and the institution. Like all important purchases ensure you go with a professional that you trust.
Keeping your tax records is important to support the information you have provided to the Canada Revenue Agency. The CRA recommends keeping your tax records for at least six years. This six-year period starts at the end of the tax year to which the records relate. Tax records include your returns and the supporting documentation used to prepare them such as expense receipts, T4s that record employment income and at-source deductions and receipts for charitable donations.