Income tax in Canada is a direct tax that a government levies on the income of its citizens. An income tax in Canada is a comprehensive account of the previous calendar year’s (January 1 to December 31) income and deductions, along with federal, provincial, and territorial taxes paid and owed.
It also helps to determine if you’re entitled to a refund from the government of some or all of the tax that was deducted from your income during that year.
The income tax in the Canadian system is a self-assessment regime. Taxpayers assess their tax liability by filing a return with the Canada Revenue Agency(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.
Table of Contents
- 1 Who should pay Income Tax in Canada
- 2 Income Tax Due Date
- 3 Income Tax in Canada vs the US
- 4 Income tax in Canada for permanent residents (PR)
- 5 Who is a resident of Canada for income tax purposes
- 6 Income tax in Canada by province
- 7 Quebec Income Tax
- 8 Personal federal marginal tax rates
- 9 Income tax in Canada BC
- 10 BC income tax brackets and rates – 2021 tax year
- 11 Income tax in Canada calculator
- 12 Tax Refund In Canada
- 13 How tax refunds work for employees
- 14 How tax refunds work for the self-employed
Who should pay Income Tax in Canada
Every permanent resident(PR) of Canada is required to file an income tax in Canada annually. If you’re a newcomer in Canada or have returned to Canada after spending an extended period outside the country, you may be required to file an income tax return.
Income Tax Due Date
when is income tax due?
April 30 is the cutoff for turning in your individual income tax return and paying any taxes owed.
Normally, if you’re self-employed, you and your spouse or common-law partner have until June 15 to hand your tax paperwork over to the Canada Revenue Agency. But you still need to pay any tax balances by the end of April.
Income Tax in Canada vs the US
- While U.S. federal income tax brackets span from 10% to 37% for individuals, in Canada, tax rates are between 15% and 33%. However, in the U.S., singles making over $40,526 annually pay 22% in taxes, whereas Canadian singles making less than $49,020 only have to pay 15% in taxes.45
- The U.S. and Canada are two countries in North America with many similarities and quite a few important differences.
- While the United States is much larger than its northern neighbor in terms of GDP, the average income per capita is similar in both places.
- While people generally pay more in taxes in the United States, Canada offers superior social benefits.
- The cost of attending a university and expenses for healthcare are typically less in Canada.
Income tax in Canada for permanent residents (PR)
If the Canada Revenue Agency (CRA) considers you a permanent resident, a factual resident, or a deemed resident, then you have an obligation to file income tax in Canada, as well as to report all of your worldwide income.
You are also required to claim all deductions and non-refundable tax credits that apply to you.
Who is a resident of Canada for income tax purposes
As individuals who spend a total of 183 days or more in a year in Canada or who are employed by the Government of Canada or a Canadian province.
An individual may take into account their residency status under a relevant Canadian tax treaty when determining whether they are a resident in Canada.
Income tax in Canada by province
Provinces and territories that have entered into tax collection agreements with the federal government for the collection of personal income taxes must use the federal definition of “taxable income” as the basis for their taxation.
This means that they are not allowed to provide or ignore federal deductions in calculating the income on which provincial tax is based.
Income tax in Canada by province provides both refundable tax credits and non-refundable tax credits to taxpayers for certain expenses. They may also apply surtaxes and offer low-income tax reductions.
The CRA collects personal income taxes for agreeing provinces/territories and remits the revenues to the respective governments.
The provincial tax forms are distributed with the federal tax forms, and the taxpayer need make only one payment—to CRA—for both tax.
Similarly, if a taxpayer is to receive a refund, he or she receives one bank transfer for the combined federal and provincial, and territorial tax refund.
Individuals with business income have to pay tax on the business income to the province in which it was earned.
If it was earned in more than one province, it is allocated based on a formula in the Income Tax Regulations.
Canadian Income Tax Rates Table by Province
Tax for all provinces (except Quebec) and territories is calculated the same way as federal tax. Form 428 is used to calculate this provincial or territorial tax. Provincial or territorial specific non-refundable tax credits are also calculated on Form 428.
|Provinces and Territories||Provincial and territorial tax rates (combined chart)|
|Newfoundland and Labrador||8.7% on the first $38,081 of taxable income, +|
|Newfoundland and Labrador||14.5% on the next $38,080, +|
|Newfoundland and Labrador||15.8% on the next $59,812, +|
|Newfoundland and Labrador||17.3% on the next $54,390, +|
|Newfoundland and Labrador||18.3% on the amount over $190,363|
Quebec Income Tax
Quebec administers its own personal income tax system and therefore is free to determine its own definition of taxable income.
To maintain simplicity for taxpayers Quebec parallels many aspects and uses many definitions found in the federal tax system.
Quebec chooses to receive part of its health and social transfers in tax points instead of cash.
To compensate for this, federal personal income taxes on income earned in Quebec are reduced by 16.5% of federal tax. This is referred to as the Quebec Abatement.
Personal federal marginal tax rates
The following historical federal marginal tax rates of the Government of Canada come from the website of the Canada Revenue Agency.
They do not include applicable provincial income taxes. Data on marginal tax rates from 1998 to 2018 are publicly available.
Data on basic personal amounts (personal exemption taxed at 0%) can be found on a year-by-year basis is also available.
The most common additional deductions are Canada Pension Plan (CPP), Employment Insurance (EI), and employment credit.
Exempt amounts are calculated, multiplied by the lowest tax rate and the result is tax credits that reduce the total amount of tax owed.
Canada’s marginal tax rates of taxable income 1998-2021
|Year||Personal amount||Canadian federal marginal tax rates of taxable income|
|2021||13808||$0 – $49,020||$49,020 - $98,040||$98,040 - $151,978||$151,978 - $216,511||over $216,511|
|2020||13229||$0 – $48,535||$48,535 - $97,069||$97,069 - $150,473||$150,473 - $214,368||over $214,368|
|2019||12069||$0 – $47,630||$47,630 - $95,259||$95,259 - $147,667||$147,667 - $210,371||over $210,371|
Income tax in Canada BC
BC income tax brackets and rates – 2021 tax year
|Taxable Income – 2021 Brackets||Tax Rate|
|$0 to $42,184||5.06%|
|$42,184.01 to $84,369||7.70%|
|$84,369.01 to $96,866||10.50%|
|$96,866.01 to $117,623||12.29%|
|$117,623.01 to $159,483||14.70%|
|$159,483.01 to $222,420||16.80%|
Income tax in Canada calculator
For example, If you make $52,000 a year living in the region of Ontario, Canada, you will be taxed $11,432. That means that your net pay will be $40,568 per year, or $3,381 per month.
Your average tax rate is 22.0% and your marginal tax rate is 35.3%. This marginal tax rate means that your immediate additional income will be taxed at this rate.
For instance, an increase of $100 in your salary will be taxed $35.27, hence, your net pay will only increase by $64.73.
A $1,000 bonus will generate an extra $647 of net income. A $5,000 bonus will generate an extra $3,237 of net income.
Tax Refund In Canada
The income tax refund is the result of overpaying the government. The CRA collected too much tax from you and is now refunding the excess. The bigger the refund the more interest, investment, and spending opportunities you lost out on throughout the year.
How do tax refunds work?
Refunds work differently for employees and the self-employed. Here’s what you need to know.
How tax refunds work for employees
Employers collect tax on behalf of the government at the source from the paycheque before it even gets to your bank account. Employed individuals file a tax return detailing their income, deductions, credits before April 30 of the following year to figure out the actual tax they owed.
If they paid more than they owe, then the government refunds the money. If they are underpaid (likely because they have investment or other sources of income) then they must pay up by April 30th.
How tax refunds work for the self-employed
In contrast, self-employed individuals are responsible for their own cash flow throughout the year. Ideally, they should estimate their average tax rate at the beginning of the year, and transfer that percentage from each paid invoice to a separate bank account.
At the end of the fiscal year, the self-employed add up all their income, subtract expenses, deductions, determine their average tax rate and then subtract credits. Because no taxes have yet been collected, they must send the full amount to the CRA.
The self-employed requires the time to do bookkeeping, plus the willpower not to spend the accumulated cash.
Those who pay taxes annually like this rarely receive a refund. The vigilance this approach requires usually results in the taxpayer paying the correct or nearly correct amount in taxes.
It’s also possible for this group to pay taxes throughout the year, in quarterly installments. There are several different ways to calculate how much these installments are, but it’s unlikely it will add up to the exact amount owed. If you overpay, you will get a refund.
This group generally has until April 30th to pay any taxes owed and until June 30th to actually file a return.