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Canada levies personal income tax on the worldwide income of individuals
resident in Canada and on certain types of Canadian-source income earned by
non-resident individuals.
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:
1. deduction at source - for example where an employer deducts income tax
directly from an individual's pay and sends it to the CRA.
2. installment payments - where an individual pays their estimated taxes in
advance to the CRA.
3. arrears payments - payments made with the income tax return or after the
return is filed
Employers may also deduct Canada Pension Plan (CPP) contributions and Employment
Insurance (EI) premiums from their employees' gross pay. Employers then send
these deductions to the CRA.
Individuals who have overpaid taxes or had excess tax deducted at source will
receive a refund from the CRA upon filing their annual tax return.
Generally, personal income tax returns for a particular year must be filed with
CRA on or before April 30 of the following year.
Basic calculation
An individual taxpayer must report his or her total income for the year. Certain
deductrions are allowed in determining net income, such as deductions for
contributions to Registered Retirement Savings Plans, union and professional
dues, child care expenses, and business investment losses. Net income is used
for determining several income-tested social benefits provided by the federal
and provincial/territorial governments. Further deductions are allowed in
determinining taxable income, such as capital losses, half of capital gains
included in income,and a special deductions for residents of northern Canada.
Deductions permit certain amounts to be excluded from taxation altogether.
Tax payable before credits is determined using four tax brackets and tax rates.
Non-refundable tax credits are then deducted from tax payable before credits for
various items such as a basic personal amount, dependents, Canada/Quebec Pension
Plan contributions, Employment Insurance premiums, disabliites, tuition and
education and medical expenses. these credits are calculated by mulitplying the
credit amount (e.g., the basic personal amount of $8,648 in 2005) by the lowest
tax rate. This mechanism is designed to provide equal benefit to taxpayers
regardless of the rate at which the pay tax.
A non-refundable tax credit for charitable donations is calculated at the lowest
tax rate for the first $200 in a year, and at the highest tax rate for the
portion in excess of $200. This tax credit is designed to encourage more
generous charitable giving.
Certain other tax credits are provided to recognize tax already paid so that the
income is not taxed twice:
-- the dividend tax credit provides recognition of tax paid at the corporate
level on income distributed from a Canadian corporation to individual
shareholders; and
-- the foreign tax credit recognizes tax paid to a foreign government on income
earned in a foreign country.
Provincial/territorial personal income taxes
Provinces and territories that have entered into tax collection agreements with
the federal government for collection of personal income taxes ("agreeing
provinces", i.e., all provinces and territories except Quebec) must use the
federal definition of "taxable income" as the basis for their taxation. This
means that they are not allowed to provide deductions in calculating the income
on which tax is based.
Provincial and territorial governments provide both non-refundable tax credits
and refundable tax credits to taxpayers for certain expenses. They may also
apply surtaxes and offer low-income tax reductions.
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 need make only 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.
Quebec
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,however, Quebec parallels many aspects of and uses many definitions
found in the federal tax system.
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 2006
are available here. Data on personal basic amounts (personal exemption taxed at
0%) can be found on a year by year basis here. Their values are contained on
line 300 of either the document "Schedule 1 - Federal Tax", or "General Income
Tax and Benefit Guide", of each year by year General Income Tax and Benefit
Package listed.
Canadian federal marginal tax rates of taxable income
2005 $0 - $8,648 $8,648 - $35,595 $35,595 - $71,190 $71,190 - $115,739 over
$115,739
0% 15% 22% 26% 29%
2004 $0 - $8,012 $8,012 - $35,000 $35,000 - $70,000 $70,000 - $113,804 over
$113,804
0% 16% 22% 26% 29%
2003 $0 - $7,756 $7,756 - $32,183 $32,183 - $64,368 $64,368 - $104,648 over
$104,648
0% 16% 22% 26% 29%
2002 $0 - $7,634 $7,634 - $31,677 $31,677 - $63,354 $63,354 - $103,000 over
$103,000
0% 16% 22% 26% 29%
2001 $0 - $7,412 $7,412 - $30,754 $30,754 - $61,509 $61,509 - $100,000 over
$100,000
0% 16% 22% 26% 29%
2000 $0 - $7,231 $7,231 - $30,004 $30,004 - $60,009 over $60,009
0% 17% 25% 29%
1999 $0 - $6,794 $6,794 - $29,590 $29,590 - $59,180 over $59,180
0% 17% 26% 29%
1998 $0 - $6,794 $6,794 - $29,590 $29,590 - $59,180 over $59,180
0% 17% 26% 29%
Income not taxed
the following types of income are not taxed in Canada (this 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*;
-- certain civil and military service pensions;
-- 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;
-- 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.
*(Quebec has changed its rules in 2004 and, legally, this may be taxed or may
not–Courts have yet to rule)
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