Taxation in Canada

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Canada's taxation rate is about average among OECD countries, but it is significantly higher than the rate in the United States, the country with which Canada usually compares itself. In total, about 36.8% of Canada's GDP goes to taxes.

Today approximately 70% of government income comes from taxation, the rest from tariffs, fees, and investments.

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Income taxes

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Personal income taxes

Both the federal and provincial governments impose income taxes on individuals, and these are the most significant sources of revenue for those levels of government accounting for over 40% of tax revenue. The federal government charges the bulk of income taxes with the provinces charging a lower percentage. Income taxes throughout Canada taxes are progressive with the wealthy paying a higher percentage than the poor. Canadian income taxes are still less progressive than those of many nations.

Where income is earned in the form of a capital gain, only half of the gain is included in income for tax purposes; the other half is not taxed.

Federal and provincial income tax rates are shown at [1].

Personal income tax can be deferred in a Registered Retirement Savings Plan, a tax sheltered savings account or mutual fund that is intended to help individuals save for their retirement.

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Corporate taxes

Companies and corporations pay tax on profit income and on capital. These make up a relatively small portion of total tax revenue. Tax is paid on corporate income at the corporate level before it is distributed to individual shareholders as dividends. A tax credit is provided to individuals who receive dividend to reflect the tax paid at the corproate level. This credit does not eliminate double taxation of this income completely, however, resulting in a higher level of tax on dividend income than other types of income. (Where income is earned in the form of a capital gain, only half of the gain is included in come for tax purposes; the other half is not taxed.)

Starting in 2002, several large companies converted into income trusts in order to reduce or eliminate their income tax payments, making the trust sector the fastest-growing in Canada as of 2005. Conversions were almost halted in September 2005 when Finance Minister Ralph Goodale suspended advance tax rulings on trusts. They resumed in November when the Department of Finance announced that the trusts would not be taxed, and proposed that the dividend tax credit be revised so that dividend income would be taxed at the same rate as income from a trust in order to eliminate the introduced to match the trust advantage. In order for this parity to be achieved, the necessary amendments will have to be passed by the next parliament, along with the corporate income tax cuts that are proposed to take in 2010, and the provincial governments will have to introduced improvements to their dividend tax credits. [2]

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Sales taxes

The federal government levies a multi-stage sales tax of 7% on goods and services, which is called the Goods and Services Tax (GST), and, in some provinces, the Harmonized Sales Tax (HST). The GST/HST is similar to a value-added tax.

All provincial governments except Alberta levy sales taxes as well. The provincial sales taxes of Nova Scotia, New Brunswick and Newfoundland and Labrador are harmonized with the GST. That is, a rate of 15% HST is charged instead of separate PST and GST. Both Quebec and Prince Edward Island apply provincial sales tax to the sum of price and GST. The territories of Nunavut, Yukon and Northwest Territories do not charge provincial sales tax.

Provincial sales tax rates at the retail level on goods and some services are as follows:

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Property taxes

The municipal level of government is funded largely by property taxes on residential, industrial and commercial properties. These account for about ten percent of total taxation in Canada.

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Excise taxes

Both the federal and provincial governments impose excise taxes on inelastic goods such as cigarettes, gasoline, and alcohol. A great bulk of the costs of these items in Canada are taxes. These are jokingly referred to by Canadians as "sin-taxes".

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Payroll taxes

Ontario levies a payroll tax on employers, the "Employer Health Tax", of 1.95% of payroll. This tax was designed to replace revenues lost when health insurance premiums, which were often paid by employers for their employees, were eliminated in the early 1990s.

Premiums for the Employment Insurance system and the Canada Pension Plan are paid by employees and employers. Premiums for Workers' Compensation are paid by employers. These premiums account for 12% of government revenues. These premiums are not considered to be taxes because they create entitlements for employees to receive payments from the programs, unlike taxes, which are used to fund government activities.

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Health and Prescription Insurance Tax

Ontario charges a tax on income for the health system. These amounts are collected through the income tax system, and do not determine eligiblity for public health care. The Ontario Health Premium is an additional amount charged on an individual's income tax that ranges from $300 for people with $20,000 of taxable income to $900 for high income earners. Individuals with less than $20,000 in taxable income are exempt.

Quebec also requires residents to obtain prescription insurance. When an individual does not have insurance, they must pay an income-derived premium. As these are income related, they are considered to be a tax on income under the law in Canada.

Other provinces, such as British Columbia and Alberta, charge premiums collected outside of the tax system for the provincial medicare systems. These are usually reduced or eliminated for low-income people.

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Inheritance tax

Since the government of Brian Mulroney in the 1980s, Canada has had no inheritance taxes. Instead, inheritance is treated as a disposal subject to the same capital gains taxation as, for example, the sale of the asset.

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History

When Canada became independent in 1867, the British North America Act attempted to create a centralized federal government with unlimited revenue gathering abilities. The federal government was entrusted with the high cost programs, most notably defence and the building of railways. The provinces were given limited taxation power, they could only impose direct taxes such as sales and income tax. They were given responsibilities that were meant to be cheaper such as health care and education.

For the early part of Canadian history most federal government revenue came from tariffs on trade with excise taxes making up the rest of the government's funding. The largest source of provincial funding was license permits and transfers of funds from the federal government. The first corporate taxes were introduced at the end of the nineteenth century.

This resulted in a crisis during the Great Depression. The provincial governments were responsible for the skyrocketing welfare costs, but they could not raise enough taxes, especially since the taxes permitted the provinces were so dependent on the health of the economy. The federal government still had plenty of money, however. This resulted in the system of transfer payments between the two levels of government that continues to this day.

The First World War had mostly been financed by traditional means, but in 1917, a tax on income was introduced as a temporary measure to fund the war. The income tax has since become a permanent feature of the Canadian tax system. The Second World War led to dramatic change in the tax system. The percentage of Canadian government revenue from indirect taxes fell from 90% in 1913 to less than 40% by 1946. Instead, Canadians began to pay income taxes and direct taxes has since provided the greatest bulk of government funding.

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Income not taxed

It is interesting to note what is not taxed in Canada. The following list is not comprehensive:

  • 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 (Quebec has changed rules in 2004 and, legally, this may be taxed or may not–Courts have yet to rule);
  • certain civil and military service pensions;
  • war disability pensions;
  • RCMP pensions or compensation paid in respect of injury, disability, or death (Quebec has changed rules in 2004 and, legally, this may be taxed or may not–Courts have yet to rule);
  • income of First Nations, if situated on a reserve;
  • profit from the sale of a taxpayer’s principal residence;
  • provincial child tax credits or benefits and Québec family allowances;
  • the goods and services tax or harmonized sales tax credit (GST/HST credit); and
  • the Canada Child Tax Benefit.
  • income used to pay interest on loans used for the purpose of taxable business investment.
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International taxation

Canadian individuals and corporations pay income taxes based on their world-wide income. They are protected against double taxation through the foreign tax credit, which allows taxpayers to deduct from their Canadian income tax otherwise payable the income tax paid in other countries.

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Administration

Federal taxes are collected by the Canada Revenue Agency (CRA), formerly known as "Revenue Canada" or the "Canada Customs and Revenue Agency".

Under "Tax Collection Agreements", CRA collects and remits to the provinces:

  • Provincial personal income taxes on behalf of all provinces except Quebec, so that individuals outside of Quebec file only one set of tax forms each year for their federal and provincial income taxes.
  • Corporate taxes on behalf of all provinces except Quebec, Alberta and Ontario.
  • Provincial sales taxes in New Brunswick, Nova Scotia and Newfoundland and Labrador.

The Ministère du revenu du Québec collects the GST in Quebec on behalf of the federal government, and remits it to Ottawa.

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See also

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