Canada offers an extremely high quality of life to its residents. It’s so high, in fact, that Canada has ranked as the number one country offering the best quality of life globally.
With an incredibly high living standard, free healthcare, and secondary education for its residents, all of the financial resources to benefit close to 38 million residents must come from somewhere. This is why there is a much higher-than-average tax rate in Canada than in most other countries.
Canadian tax rates are lower than America’s. There is an ongoing debate that Canada has higher income tax rates than its American counterparts, which has been ongoing for quite a long time, yet the Internal Revenue Service (IRS) for CRA taxes some of the richest Americans 37%, and Canadians only 33% in 2021. Although Americans benefit with their low mortgage interest deduction rates, Canadians who make less than $84,200 that don’t own a home, are likely to pay much less tax.
What is the Canadian Income Tax Rate?
In Canada, you can expect many different types of taxes, including land transfer tax, sales tax, gas tax, liquor tax, and even custom tariffs on imported goods. You can also expect to pay tax on assets, including property taxes and income tax, as in any other country too. While tax is not something many people bother to be informed about, it is something that we must all pay, as there can be consequences for those who don’t pay it.
When in Canada, for every dollar you make, you must pay tax on it, which is otherwise known as income tax. While tax is recognized as something we encounter daily worldwide, it used to be thought of as something that the Canadian government resisted. Now, high taxes promise Canadians a high quality of life. Canadian residents understand that they are paying for their quality of life and know that the country offers the best there is, which makes every tax dollar owed worth it.
Today, married couples and single individuals have identical federal personal exemptions at about $13,230. The top federal tax rate is 33%, and with provincial tax rates, the total marginal tax rate is 53.53%. While most people pay income tax, 33% of Canadians don’t, which is about 9 million people. For those who do pay tax, this is usually considered among the top biggest expenses on their budget, which contributes to a high cost of living in Canada. Nevertheless, higher living costs are supported by higher than average salaries across industries. Collectively, Canadian tax makes up $265 billion each year, which is directly allocated to the government. This amount makes up 50% of the country’s revenue.
The tax rate in Canada is high because it pays for the country’s military, police force, operating expenses, delivery services, libraries, hospitals, high schools, prisons, roads, and the CBC. A large amount of taxes are also directed to lower-income Canadians or residents living in poverty as child benefits, social assistance, employment insurance, and old age security.
- Employment income
- Self-employment income minus expenses
- Pension income
- Income from selling stocks, investment property and bonds
- Withdrawals from RRSPs
- Foreign Income
- Corporate income minus expenses
- Lottery winnings (most)
- Child benefit payments
- Inheritances and gifts (most)
- GST/ HST credit
- Payouts from life insurance policies
- Withdrawals from TFSA
Annual Canadian Tax Deadline and Rules
Since every person living in Canada must file a tax return, regardless of whether they earn money or not, it’s important to know exactly when you are supposed to file for your tax return, which has a different date than when you must pay your income tax for some individuals.
People who are employed must file their income tax and make payment for it on the same date, which is the 30th of April. Their tax return is fairly easy because tax gets deducted at the sources on each of their paycheque, making the tax calculation much simpler.
People who are self-employed have a different set of rules and must pay any taxes that are owed by the 30th of April annually. They have until the 15th of June to file their return, which is due to the fact that their taxes are complicated. Self-employed individuals must set aside money throughout the entire year, which means that they must be organized and keep track of their expenses each month.
For large businesses, taxes that are owed must be paid two months after their year-end, which may differ from business to business. Small Canadian businesses, however, have up until three months after their year-end to pay their taxes
If a tax return and payment is late, the CRA charges a late fee, which is 5% of the balance owed, with an additional 1% for every month that you are late with your payment.
For a more detailed breakdown of Canadian income tax, refer to the Canadian Government Website.
If you work and live in Canada, you must report your income tax to the Community Reinvestment Act (CRA), which can be done by filing your tax return. With this return, you must list each one of your income sources and take note of your eligibility for possible deductions or credits, if there are any.
The Canadian tax system relies on trust and expects all Canadian residents to be honest about their different sources of income, should there be more than one. They depend on citizens to self-report their income accurately. You must refrain from cheating on your taxes, which is a serious offense in Canada, especially since the Canadian government relies on taxes to look after the country and its people. Should residents not pay taxes, the system would collapse. In recent years, the CRA has caught fraudsters and has allocated $444.4 million over 5 years to track down $2.6 billion lost in additional taxes. Tax returns must be filed annually, even if you don’t earn any money in Canada. This is for the government’s records only.
If you pay taxes, the Canadian government may redistribute it to you once they determine that you are eligible to receive it, which is decided based on your tax return. By not filing your taxes, you could be missing out on receiving a portion of your tax money back, which also makes it beneficial for you to file it annually. Some tax payouts that you could be eligible for include child tax benefits, GST/ HST credit, and guaranteed income supplement.
How to Reduce Income Tax Legally
1. Change up income sources
Employment income and interest make up some of the biggest expenses of Canadian residents, yet dividends and capital gains are taxed next to nothing. To be smart about income tax, instead of only relying on your job to render you the biggest portion of your income, you can try to invest your money. Should you manage to invest long-term, you can transfer your surplus income from your main salary into your investment portfolio, which will help you save a large percentage of your income from taxes.
2. Move from a sole proprietorship to an incorporation
If you are a freelancer, whether it be full-time or part-time or you own a small business, you can consider switching from being a sole-proprietor to a corporation. Even though incorporating includes heavier compliance requirements, along with a more complicated tax return, it can help you decrease your tax rate significantly. It can be reduced from as much as 53.5% to 13.5%. However, this is only inside of the corporation. Any payments you make to yourself or others will be taxed. This is a good strategy for people that make enough money to retain income with their earnings inside of the corporation.
3. Defer taxes
While you should still meet tax deadlines, it is best to file your tax before paying for it as late as you can without holding on to your money. That’s because money tends to grow over time. To defer taxes, you can invest your money inside your RRSP, which can grow sheltered from taxes up until the day you withdraw your funds in retirement. Although you still have to pay taxes, you can grow your money through investments and keep it there, which will make your current marginal tax rate much lower than it would be otherwise.
4. Maximize deductions
The more deductions you pay, the less tax you have to pay. Since it helps you reduce the scale of your tax bracket, it can be a good idea to pay more for deductions like charitable donations, union dues, medical expenses, RRSP contributions, childcare expenses, and capital losses.
The Canadian Tax Structure for Buyers and Sellers
Given that everybody in Canada must pay tax, yet there is a unique list of criteria and many other factors that determine how much residents need to pay on an annual basis. While lower income-generating individuals have to pay less tax, higher-earning residents must pay significantly more. Depending on how much you earn in Canada is a big factor that determines how much tax you will pay.
Canada has two main types of taxes, which include:
- Value-added tax (VAT) - A goods and services tax (GST), which is assessed by the federal government.
- Provincial sales tax (PST) - A tax plan that is assessed by Canada’s provincial governments. PST tax rates vary from province to province, and can be based on the value of goods and services before the federal tax assessment. It can also be based on the value that includes the federal tax assessment.
Different types of taxes in Canada include:
- Goods and Services (GST) - Since January 1991, Canada changed from a federal sales tax to a federal value-added tax, otherwise known as a Goods and Services Tax (GST). Today, provincial taxes are still calculated as a sales tax.
- Provincial Sales Tax (PST) - Every province can calculate PST, which is calculated after the GST gets calculated, which is based on pre-GST value and is based on the value after GST is added, much like a tax on a tax. Every province has different PST rates.
If you are a seller of goods or services, you must remit the federal and provincial taxes to tax authorities. It is also acceptable for a seller to remit the federal tax only, which will require the purchaser to remit provincial tax (self-assessment tax).
PST is calculated on the pre-GST value:
Value of the product x GST tax rate
=1000 x 0.7
Value of the product x PST tax rate:
=1000 x 0.5
PST is calculated after the GST is added: (tax on tax)
= Value of the product x GST tax rate
= 1000 x 0.7
= (Value of the product + GST) x PST tax rate
= (1000 + 70) x .05
Total tax due:
= GST + PST
= 70 + 53.50
PST can be remitted to Canadian tax authorities by a seller or buyer through either self-assessed PST or Seller-assessed PST.
Calculate Your Income Tax
Given that you are now informed about the tax rates in Canada, you can now calculate your income tax.
To keep things simple, you can get a rough estimate of the tax you owe by calculating your total income annually, minus your applicable deductions. You can then multiply your income, per income source, by the suitable marginal tax rate.
To simplify the process even more, with your Canadian tax rate, you can refer to the online tax calculator. Alternatively, you can pay through online banking by setting up the CRA as your bill payee through the bank, pay directly at the CRA with your debit card or make use of a third-party service to pay with your credit card.
If you have not applied for permanent Canadian residency yet or are yet to complete your paperwork and process your application, why not consult a professional? Our Regulated Canadian Immigration Consultants (RCICs) are approved by the Canadian government and ready to help you to become a permanent Canadian resident.