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Personal income taxes

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.

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After the calendar year, Canadian residents file a T1 Tax and Benefit Return[4] for individuals. It is due April 30, or June 15 for self-employed individuals and their spouses, or common-law partners. It is important to note, however, that any balance owing is due on or before April 30. Outstanding balances remitted after April 30 may be subject to interest charges, regardless of whether the taxpayer's filing due date is April 30 or June 15.

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 - where income tax is deducted directly from an individual's pay and sent to the CRA.
   2. installment payments - where an individual must pay his or her estimated taxes during the year instead of waiting to settle up at the end of the year.
   3. payment on filing - payments made with the income tax return
   4. arrears payments - payments made after the return is filed

Employers may also deduct Canada Pension Plan/Quebec Pension Plan (CPP/QPP) contributions, Employment Insurance (EI) and Provincial Parental Insurance (PPIP) premiums from their employees' gross pay. Employers then send these deductions to the taxing authority. 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 deductions 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 determining "taxable income", such as capital losses, half of capital gains included in income, and a special deduction 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, disabilities, tuition and education and medical expenses. These credits are calculated by multiplying the credit amount (e.g., the basic personal amount of $10,382 in 2010) by the lowest tax rate. This mechanism is designed to provide equal benefit to taxpayers regardless of the rate at which they 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 and 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 or ignore federal deductions in calculating the income on which provincial 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. Information on provincial rates can be found on the Canada Revenue Agency's website[5].

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.

The following types of income are not taxed in Canada (this list is not exhaustive):

    * 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;
    * income from certain international organizations of which Canada is a member, such as the United Nations and its agencies;
    * 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;
    * Working income tax benefit;
    * the Goods and Services Tax or Harmonized Sales Tax credit (GST/HST credit) or Quebec Sales Tax credit; and
    * the Canada Child Tax Benefit.

Note that the method by which these forms of income are not taxed can vary significantly, which may have tax and other implications; some forms of income are not declared, while others are declared and then immediately deducted in full. Some of the tax exemptions are based on statutory enactments, others (like the non-taxability of lottery winnings) are based on the non-statutory common law concept of "income". In certain cases, the deduction may require off-setting income, while in other cases, the deduction may be used without corresponding income. Income which is declared and then deducted, for example, may create room for future Registered Retirement Savings Plan deductions. But then the RRSP contribution room may be reduced with a pension adjustment if you are part of another plan, reducing the ability to use RRSP contributions as a deduction.

Deductions which are not directly linked to non-taxable income exist, which reduce overall taxable income. A key example is Registered Retirement Savings Plan (RRSP) contributions, which is a form of tax-deferred savings account (income tax is paid only at withdrawal, and no interim tax is payable on account earnings).

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