Canada's Tax System
Understanding Canadian Income Tax
How Does Canadian Residence Status Affect Income Tax?
🗣️In Canada, it's your residence status, not citizenship, that determines how you're taxed. You can be categorized as an ordinarily resident, a non-resident, or an immigrant/emigrant for tax purposes.
What's the Self-Assessment System?
🗣️In Canada, by law, you calculate your own taxes and file an income tax return each year.
How does it work?
🗣️You figure out your yearly taxable income and the tax owed. If you've overpaid, you get a refund; if not, you pay the balance.
What is Canada's Progressive Tax System and What Are the 2022 Federal Tax Rates?
🗣️In Canada, the tax rates increase as your income rises, which is known as a "progressive" tax system. For 2022, the federal tax rates are as follows:
15% on income up to $50,197
20.5% between $50,197 and $100,392
26% between $100,392 and $155,625
29% between $155,625 and $221,708
33% on income above $221,708
Is the tax levied individually or on a family basis?
🗣️The tax is calculated individually, not based on a family's combined income. This means that a family where one spouse earns $80,000 (for example) will pay more in taxes than a family where each spouse earns $40,000, even though the total family income is the same,example below:
Scenario 1: One earner at $80,000
The first $50,197 is taxed at 15%
The remaining $29,803 is taxed at 20.5%:
Scenario 2: Two earners at $40,000 each
The income of $40,000 falls within the first bracket, so it's taxed at 15%:
First earner : 40,000×15%=6,000
Second earner: 40,000×15%=6,000
Total tax for both:
🗣️In both scenarios, the total family income is $80,000. However, the tax liability differs. For the single-earner family, the tax is $13,639.17, whereas for the dual-earner family, it's $12,000. The single-earner family ends up paying $1,639.17 more in taxes.
Know When You Need to Submit Your Tax Return!
In Canada, filing your taxes is pretty important, not just for staying on the right side of the law, but also to ensure you get to enjoy various benefits and settle any taxes you owe. If any of the following situations apply to you, then it's time to file your tax return:
☑️ Application for or receipt of advance Canada Workers Benefit payments for the current or upcoming tax year.
☑️ Claim of a capital gains reserve on the previous year's tax return.
☑️ Desire to carry forward unused amounts like tuition or retirement contributions to future years.
☑️ Desire to claim tax credits for Goods and Services Tax or Harmonized Sales Tax, or any related provincial credits.
☑️ Direct request to file a tax return received from the Canada Revenue Agency.
☑️ Election to split pension income with a spouse or common-law partner.
☑️ Expectation of a tax refund from the government.
☑️ Intention to claim the Canada Workers Benefit for the current tax year.
☑️ Intention to initiate or continue receiving supplemental income through the Old Age Security program.
☑️ Intention to initiate or continue receiving the Canada Child Benefit (spouse or common-law partner must also file if applicable).
☑️ Non-capital losses incurred, with the intention to apply them to future years.
☑️ Outstanding tax debt owed to the government.
☑️ Repayment of some or all Old Age Security or Employment Insurance benefits.
☑️ Reporting of income to maintain up-to-date retirement contribution limits.
☑️ Requirement to contribute to the Canada Pension Plan due to earnings above the basic exemption.
☑️ Residence in an eligible province for the Climate Action Incentive.
☑️ Sale of significant assets like real estate or stocks, resulting in taxable capital gains or losses.
☑️ Voluntary payment of Employment Insurance premiums on self-employment or other qualifying earnings.
☑️ Withdrawals from the Lifelong Learning Plan or Home Buyers' Plan that remain unpaid.
If you are uncertain about whether you need to file, it's generally safer to submit a tax return to avoid possible penalties or issues. Should you require assistance or have questions regarding your tax filing obligations, feel free to contact us. We are a professional tax service organization here to help you navigate the complexities of the Canadian tax system.
Specified Foreign Property
Q: I've heard Canadian residents need to report income from all sources, including foreign ones. Is this true?
A:Yes, that's correct. Canadian residents are obligated to report their income from all sources, whether the income is generated inside or outside of Canada.
Q:Are there any exceptions to this rule?
A:Yes, there is an exception. Individuals who immigrated to Canada during the tax year are not required to answer the question about foreign property in the tax return for that year.
Q:Where can I find the question about foreign property on the tax return?
A:The question related to foreign property can be found in the "Foreign property" section located in Step 1, page 2 of the tax return.
Q:What should I do if my answer to the foreign property question is “Yes”?
A:If you answer "Yes" to having specified foreign property, you must complete the form T1135 - Foreign Income Verification Statement. This form must be filed with the Canada Revenue Agency (CRA) before the tax return's due date. This is mandatory even if you are not otherwise required to file a tax return for that year. Download T1135 here>>>
Q:What is the form T1135 used for?
A:The form T1135 - Foreign Income Verification Statement is used to provide more detailed information regarding a taxpayer's foreign property and income. It ensures that the CRA has comprehensive information about Canadian residents' foreign income to ensure proper taxation.
Q:What foreign property I don't need report?
A:If you have a property mainly for personal use, like a holiday home, you don't have to report it. But, if you rent it out for part of the year aiming to make a profit, you do. If you're just covering your own costs by renting, then you don't. Retirement accounts, like RRSPs, with foreign investments over $100,000 are exempt. So, you don't need to fill out the T1135 form for them.
Remember, it's always a good idea to consult with a tax professional if you have questions or uncertainties about your specific situation.
Federal Tax Return Filing: Standard Protocol
Understanding Step 5 of Calculating Net Federal Tax
The Canadian T1 Personal Income Tax Return form is structured through various steps and sections to calculate your taxable income, as well as any deductions and tax credits you might be eligible for. Here’s an overview of Step 5 Part A ,Part B and Part C, and how to arrive at the Net Federal Tax:
Part A - Tax on Federal Tax:
Part A is about calculating the federal tax you owe. This is based on your taxable income, which is your total income minus any allowable deductions. First, you ascertain your total income and then subtract allowable deductions (like contributions to RRSPs, employment expenses, etc.), arriving at your taxable income. Your federal tax is then computed based on this taxable income, using the progressive tax rates provided by the Canada Revenue Agency (CRA).
Part B - Federal Non-Refundable Tax Credits:
Part B lists various federal non-refundable tax credits that you might be eligible for. Non-refundable tax credits are meant to reduce the tax you owe. Examples include the basic personal amount, public transit credits, tuition credits, etc. Each credit has specific calculation methods and eligibility criteria, and you need to fill out each relevant line based on your personal situation. The total of Part B serves to reduce the tax calculated in Part A.
Part C - Net Federal Tax:
The Net Federal Tax is the amount of federal tax you owe after credits. It is calculated as the result of Part A minus the result of Part B, represented by the formula:
Net Federal Tax=Tax on Federal Tax (Part A)−Federal Non-Refundable Tax Credits (Part B)
In essence, the Net Federal Tax is the federal tax due, excluding any provincial taxes. If you had taxes withheld, these would be subtracted from the Net Federal Tax to determine the final amount you either owe or are refunded.
Note: tax laws and rates change annually, and individual circumstances can significantly impact your tax situation. For the most accurate information, always refer to the most current tax guides and forms or consult with a professional tax advisor.
Calculating Federal Tax Refund or Balance Owing:
1. Calculating Total Federal Tax:
First, you need to compute your total federal tax owed. Start by determining your total income and subtracting allowable deductions to arrive at your taxable income. This taxable income is subject to progressive federal tax rates, resulting in your total tax on federal income (Part A of Step 5 in the T1 Tax Return).
2. Applying Non-Refundable Tax Credits:
Next, apply non-refundable tax credits (Part B of Step 5). These credits directly reduce the amount of tax you owe. Sum up all eligible non-refundable tax credits and subtract this total from the total federal tax calculated in step 1.
3. Refund or Balance Owing:
The difference between your total federal tax and the total non-refundable credits gives you the Net Federal Tax. If the CRA withheld more taxes than your Net Federal Tax over the tax year (through your employer, for example), you'll receive a tax refund for the difference. If less was withheld, you'll owe the remaining balance.
Through this simplified process, you can understand whether you'll receive a federal tax refund or have a balance owing to the CRA. Always consult the most current tax guides, use accurate calculations, and consider seeking advice from tax professionals for precise filing.
Provincial or territorial Tax Return Filling: Standard Protocol
Here's a brief overview of Canadian Provincial and Territorial Tax with British Columbia (BC) as an example. While provinces and territories have similar tax structures with unique rates, deductions, and credits, details can vary significantly. Note that Quebec has a distinct tax system, administered separately by Revenu Québec.
1. Provincial Deductions:
BC Basic Personal Amount: This is a set deduction amount that every taxpayer is entitled to claim, without any specific conditions.
Other Deductions: These might include amounts paid for medical services plan premiums in BC, or amounts invested in shares of a qualifying small business, among others.
2. BC Tax Calculation:
Calculate BC Tax: Calculate the basic provincial tax based on your taxable income. The taxable income is derived after subtracting the federal deductions from your total income. Subsequently, additional provincial tax reductions and non-refundable tax credits can be applied.
Provincial Non-Refundable Tax Credits: These can be used to reduce the provincial tax payable. Examples include the BC tax reduction and other specific provincial credits.
3. BC Tax Credits and Surtaxes:
Refundable Tax Credits and Surtaxes: You might be eligible for refundable tax credits like the low-income family credit, the renter's credit, etc. Additionally, surtaxes may be applied if your income exceeds a certain threshold.
Identify Deductions & Credits: Start by identifying all the provincial deductions and tax credits you're eligible for.
Calculate Provincial Tax: Apply the BC tax rates to your taxable income to calculate the basic tax, then subtract all applicable deductions and non-refundable tax credits.
Apply Provincial Refundable Tax Credits & Surtaxes: Finally, factor in any applicable refundable tax credits and surtaxes to arrive at your final provincial tax payable.
Please note that the specific line numbers and forms may vary with each tax year, so it's crucial to refer to the most current tax guides and forms for accurate information. Since individual circumstances can vary widely, consulting with a tax professional to get precise tax advice for your situation is also advisable.