Canadian Tax System

Canada's tax system operates at both federal and provincial/territorial levels, with the Canada Revenue Agency (CRA) administering federal taxes and collecting provincial taxes for most provinces. Quebec maintains its own revenue agency (Revenu Québec) and requires separate filings.

Tax Administration

Canada Revenue Agency (CRA) administers federal income tax, GST/HST, and collects provincial income tax for all provinces except Quebec. Single filing covers both federal and provincial tax in most cases.

Self-assessment system: Taxpayers calculate and report liability. CRA processes returns and may reassess. Notice of Assessment confirms CRA's processing; Notice of Reassessment indicates changes.

Tax year: Calendar year (January 1 - December 31) for individuals. Corporations may choose fiscal year-ends.

Filing deadline: April 30 for most individuals (June 15 for self-employed, but payment still due April 30). Six-month extension for payment may be available but interest accrues.

Federal and Provincial/Territorial Tax

Canadian income tax combines federal and provincial/territorial components:

Stacked calculation: Federal tax calculated first, then provincial tax calculated separately on same taxable income. Both use progressive brackets with different rates and thresholds.

Province of residence: Provincial tax based on province of residence on December 31. Moving provinces during year means full year at new province's rates.

Quebec exception: Quebec residents file separate federal and provincial returns. Federal tax is reduced by Quebec abatement (roughly 16.5% of basic federal tax) since Quebec collects its own income tax.

Tax collection agreements: Most provinces have agreements with CRA for tax collection. This unified return system simplifies compliance but means understanding both federal and provincial rules.

Key Tax Concepts

Total income: All income from various sources before deductions. Starting point for the return.

Net income: Total income minus specific deductions (RRSP contributions, union dues, childcare expenses, moving expenses, carrying charges). Used for various calculations and benefit eligibility.

Taxable income: Net income minus additional deductions (capital gains deduction, losses from other years). Amount actually subject to tax rates.

Non-refundable tax credits: Reduce tax payable but can't create refund. Convert eligible amounts to credit at lowest federal rate. Include basic personal amount, age amount, pension income amount, medical expenses, donations.

Refundable tax credits: Can result in payment even with no tax liability. Include GST/HST credit, Canada Child Benefit, provincial credits.

Registered Accounts

Canada provides various tax-advantaged savings vehicles:

Registered Retirement Savings Plan (RRSP): Contributions deductible (reducing taxable income), growth tax-deferred, withdrawals fully taxable. Contribution room based on prior year earned income, subject to annual limit. Unused room carries forward.

Tax-Free Savings Account (TFSA): Contributions not deductible, but growth and withdrawals are tax-free. Annual contribution room accumulates from age 18. Withdrawals add back to contribution room the following year.

Registered Education Savings Plan (RESP): Contributions not deductible, but growth is tax-deferred and government grants (CESG, CLB) add to savings. Withdrawals taxed to student beneficiary (usually at low or nil rate).

First Home Savings Account (FHSA): Hybrid combining RRSP-style deduction with TFSA-style tax-free withdrawal for qualifying home purchase. Annual and lifetime contribution limits.

Home Buyers' Plan and Lifelong Learning Plan: Allow RRSP withdrawals without immediate tax for home purchase or education, with repayment over specified periods.

Employment Income

Employment income includes salary, wages, bonuses, and taxable benefits:

Source deductions: Employers withhold income tax, CPP contributions, and EI premiums. Remit to CRA. Employees receive T4 slips showing income and deductions.

Employment expenses: Generally not deductible unless specifically permitted (salesperson expenses, home office for employees required to work from home, tradesperson tools). Must have signed T2200 from employer.

Taxable benefits: Many employer-provided benefits are taxable (personal use of company vehicle, group life insurance premiums, non-cash gifts above threshold). Some benefits specifically excluded (certain health benefits, reasonable allowances).

Self-Employment and Business Income

Self-employed individuals report business income on the T1 return:

Business income: Gross revenue minus eligible business expenses. Reported on Statement of Business Activities. Professional income has similar treatment.

Home office expenses: Deductible if workspace is principal place of business or used regularly for meeting clients. Proportionate share of household costs. Detailed tracking required.

CPP contributions: Self-employed pay both employee and employer portions of CPP (no EI unless opted in). Calculated on Schedule 8.

Instalment requirements: Self-employed and those with investment income may need to pay quarterly instalments to avoid interest charges.

Capital Gains

Canada taxes capital gains preferentially:

Inclusion rate: Only a portion of capital gains is included in income (historically 50%, subject to legislative changes). Same inclusion rate applies to capital losses.

Principal residence exemption: Gain on designated principal residence is exempt. One property per family unit can be designated for each year of ownership.

Lifetime capital gains exemption: Enhanced exemption for qualified small business corporation shares and qualified farm/fishing property. Lifetime limit indexed to inflation.

Superficial loss rule: Loss denied if identical property acquired within 30 days before or after disposition. Denied loss added to cost base of replacement property.

Deemed dispositions: Leaving Canada, death, and certain other events trigger deemed disposition at fair market value, potentially realizing gains.

GST/HST

Goods and Services Tax (federal) and Harmonized Sales Tax (combined federal/provincial in some provinces):

Registration threshold: Businesses must register when taxable supplies exceed threshold in any calendar quarter or over four consecutive quarters. Voluntary registration available.

Input tax credits: Registered businesses claim credits for GST/HST paid on business purchases. Essentially makes tax a consumption tax borne by final consumers.

Provincial variation: Some provinces have HST (combined rate), others have separate provincial sales tax (PST) that's completely different system, and Alberta has no provincial sales tax.

Quick method: Simplified calculation available for small businesses. Collect normal rate, remit reduced percentage.

Common Canadian-Specific Situations

RRSP vs TFSA decision: RRSP better when contribution is at higher marginal rate than expected withdrawal rate. TFSA better for lower-income years, emergency savings, or when expecting higher future rates.

Attribution rules: Income from property transferred to spouse or minor children may be attributed back to transferor. Anti-avoidance rules require careful planning for income splitting.

Foreign reporting: Specified foreign property over threshold requires T1135 reporting. Significant penalties for non-compliance.

Departure tax: Leaving Canada triggers deemed disposition of most property. Tax may be deferred with security. Five-year deadline for unwinding certain Canadian investments.

Moving expenses: Deductible if moving at least 40km closer to new work or study location. Must have income at new location to deduct against.

Provincial Considerations

Provincial tax systems add complexity:

Different rates and brackets: Each province sets its own rates and thresholds. Combined federal/provincial marginal rates vary significantly.

Provincial credits: Some provinces have unique credits (Ontario Trillium Benefit, Quebec solidarity credit). Eligibility and amounts vary.

Quebec specifics: Separate return, different deduction and credit rules, Régime des rentes du Québec instead of CPP, Quebec Parental Insurance Plan. Requires understanding two complete tax systems.

Health premiums: Some provinces levy additional health-related taxes or premiums outside the income tax system.