Canada Tax Guide
Canadian Tax Overview
Canadian taxes may seem complicated on the surface but they are much like other countries including the United States. Canada has three levels of government which are territorial, provincial and federal. Because each tier of government provides its citizens with programs and services, each level of government has its own taxation system. Taxes collected from government entities pay for roads and highways, education, free health care, and other social benefits. Each level of government levies taxes in different forms from individuals such as personal income taxes and consumption or sales tax.
Personal Income Tax
Each Canadian citizen who is a resident or deemed a resident must file a Canadian income tax return by April 30th to determine their personal income taxes. Any person who spends 183 days per year in Canada may be deemed a resident. Canada has established tax treaties with other nations to prevent individuals from having to pay income taxes twice. Each person in the household who earns an income needs to file a return, and this provision includes teenage children who work. Some of the taxes paid through the income tax return are federal and some are provincial. The provincial taxes are paid through additional schedules added to the return. Citizens pay provincial taxes base on which province they are living in on the last day of the year regardless of where they lived the rest of the year.
Canada requires individuals to pay taxes on worldwide income as well as employment income, retirement income, commission income and investment income. Canada’s tax system is graduated which means that income at each level, and only income at that level or bracket is subject to a different percentage of tax. Every person, no matter how much their total income is, pays the same amount of tax on the first $46,605 of taxable income.
Canadian tax returns are complicated and include many rules that many citizens may find confusing. Because of this, many Canadians have their taxes prepared by a professional tax preparer. Filing past the deadline, failing to file or misrepresenting income can cause a person to have to pay penalties or even lead to criminal charges.
While filling out the income tax form, individuals may find that they qualify for several credits available to them that apply to the final amount of tax owed. The credits are non-refundable meaning that if the credits are more than the tax owed, the person cannot receive the excess in the form of a refund.
Employees will receive a T4 slip that shows the income earned as well as the various taxes withheld. For those who are self-employed, the income earned from the business will need to be supported by a profit and loss statement or similar documentation. Any retired individuals receiving a pension will receive the appropriate slip from the pension administrator. Income earned from capital gains, interest or dividends will also be reported on the tax return under associated schedules. Individuals with investment income will receive the necessary tax slips from their financial institutions to report that income.
Canadian sales tax comes in the form of a consumption tax based on the cost of goods and services. These taxes are added on to the cost of items and are paid as the individual purchases them. Some items, such as groceries, rent, health and dental services, child care and prescription drugs are not subject to sales tax. Other items, such as livestock are taxed at the rate of 0% amounting to having no sales tax.
The federal government levies a 5 percent Goods and Services Tax (GST) on everything subject to consumption tax. Some provinces levy a Provincial Sales Tax (PST) on top of the federal tax. Other provinces combine the federal and provincial tax into the Harmonized Sales Tax (HST). The sales receipt breaks down the corresponding sales taxes associated with the purchase.
Tax Savings Vehicles In Canada (RRSP, TFSA, RRIF)
RRSP – A Registered Retirement Savings Plan (RRSP) is an account that an individual can contribute to and the contributions are deducted from the taxable income during the tax year that they are made. An individual, spouse or common-law partner can make contributions up to the age of 71. Once the person starts receiving payments from the plan, the payments are taxed as income at the person’s current taxation rate. The bank or investment company withholds the taxes from the payments much like an employer.
TFSA – The Tax-Free Savings Account (TFSA) is a flexible savings vehicle that permits citizens to earn investment income that is not subject to taxation. There is a limit on how much a person can contribute annually. A TFSA can exist in the form of cash, stocks and bonds, GICs and mutual funds. The main difference between TFSA accounts and RRSP accounts is that the contributions are not tax-deductible. Only the income earned by the account is not subject to taxes, but any unused contribution room may be carried forward to the next tax year allowing a bigger contribution the next year.
RRIF – A Registered Retirement Income Fund (RRIF) is a type of account where payments are withdrawn instead of held. An RRSP must be converted to an RRIF the year the individual turns 71. Any RRSP can be converted to an RRIF at any time before the person turns 71. Once an RRSP is converted to an RRIF, the person may no longer make any contributions to the account. RRIF accounts are also subject to mandatory minimum annual withdrawals. RRIF payments are considered taxable income and are taxed at the person’s current rate.
Frequently Asked Questions
How long should a Canadian citizen keep their income tax records?
Citizens should keep a copy of their tax return and all supporting documents that support deductions or credits for six years.
Is direct deposit available for tax refunds?
Yes, refunds can be direct-deposited into a Canadian bank account.
If I owe any money but am unable to pay, should I still file my return on time?
Yes, you should still file your return by April 30 to avoid a late-filing penalty even if you don’t have the funds to pay the tax owed.
When will I get my refund?
A person expecting a refund should receive it in as little as eight days if the direct deposit information is included and an electronic return is filed on time. It can take up to eight weeks for a refund to be processed for a paper return.
What should I do if I make a mistake on my tax return?
You can submit a change online through Change my Return in My Account. If you have certified tax software, you can use ReFILE to make any changes to your return. You may mail in a paper amendment by sending any supporting documents with the completed form Form T1-ADJ, T1 Adjustment Request.
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