Taxes in Canada: A New Perspective
Taxes have often been seen as a burden, giving the impression of paying money without direct benefit. This perception tends to occur when people are uncertain whether their taxes are being used for public welfare. However, that’s definitely not the case in Canada!
The motto of the Canada Revenue Agency (CRA) is “Good taxes, good services,” and both federal and provincial governments ensure that this slogan holds true. In Canada, taxes play a crucial role in filling the national treasury, and the country’s robust economy allows individuals and businesses to pay their fair share without undue hardship.
The Canadian government has established a fair tax system designed to avoid placing unnecessary pressure on citizens. Strict yet equitable tax regulations are actually one of the many advantages of migrating to Canada.
That said, for many Iranians, the concept of paying taxes is unfamiliar, and some may feel apprehensive about it. As a result, one of the most common questions among potential immigrants looking to start a business in Canada is whether they can thrive under Canada’s strict tax laws.
In this article by Sarafi Hafez, we’ll explore the latest tax policies in Canada and their impact on businesses.
Types of Taxes in Canada
Keep in mind that Canada is a province-based (or state-based) country, meaning tax laws can vary across different provinces and cities. Nevertheless, based on federal law, Canada has three main types of taxes:
- Income, employment, and capital gains taxes
- Sales taxes, including the Goods and Services Tax (GST), Harmonized Sales Tax (HST), and Provincial Sales Tax (PST)
- Property taxes, generally levied by provincial governments and calculated based on the value of land and buildings
These taxes apply to both individuals and businesses and can sometimes seem complex. In the following sections, we will provide a detailed explanation of each tax type to clarify their nature and how they affect residents and companies alike.
Also read: Money Transfer Taxes in Canada
Income Tax in Canada
Income tax is the most common type of taxation globally, and Canada is no exception. In Canada, income tax is collected by the federal government, with provincial governments (except Quebec) also taking a smaller share.
To ensure social fairness, income tax is progressive, meaning the tax rate increases as income rises. This means that higher earners are required to pay a higher percentage of their income in taxes compared to those with lower incomes.
Under Canada’s new tax policies, the federal income tax rates are as follows:
| Annual Income (CAD) | Federal Income Tax Rate |
|---|---|
| Up to $50,197 | 15% |
| $50,197 – $100,392 | 20.5% |
| $100,392 – $155,625 | 26% |
| $155,625 – $221,708 | 29% |
| Over $221,708 | 33% |
As you can see, as annual income increases, the percentage of income tax also rises.
In addition to federal taxes, the province in which you reside will also take a portion of your income as provincial income tax. This provincial tax is also progressive and varies between provinces. Ontario has the lowest provincial tax rate, while Montreal has the highest.
Who Is Subject to Income Tax in Canada?
According to Canadian law, all citizens or permanent residents are required to file an annual tax return. However, before filing your tax return, you need to determine how much of the year you were present in Canada and engaged in economic activities. Canada only taxes income earned within its borders, including income from exports.
You are considered a Canadian resident for tax purposes if you meet any of the following criteria:
- You are officially registered with a Canadian municipality.
- You hold permanent residency.
- You are married to a Canadian citizen or have a Canadian citizen child under your care.
- You have lived in Canada for at least 183 days in a year without permanent residency.
- You possess a Social Insurance Number (SIN), health card, or Canadian driver’s license.
The Canada Revenue Agency (CRA) considers all individuals meeting these criteria to be Canadian residents and subjects them to income tax.
Note: According to Canadian law, each individual is responsible for paying their own taxes. Tax amounts are not calculated on a family basis. In other words, you, your employed spouse, and any working children (whether full-time or part-time) must each file separate tax returns.
There are also circumstances under which new immigrants can receive tax exemptions for up to five years, protecting income earned outside of Canada. However, this requires careful planning and preparation.
Types of Consumption Taxes (GST, HST, and PST)
In Canada, the Goods and Services Tax (GST) and Harmonized Sales Tax (HST) are key taxation concepts you should be familiar with.
GST is similar to a value-added tax (VAT) applied to most purchases. When you buy goods or services from any seller in Canada, a certain amount is added as a federal consumption tax.
The GST rate is currently set at 5% and is typically included in the final price of most goods. However, some essential items such as basic groceries, prescription medications, healthcare services, and dental care are exempt from GST.
In addition to GST, provinces also charge a separate consumption tax known as the Provincial Sales Tax (PST). The PST rate varies by province and is often higher than the GST. For instance, in Ontario, you pay 5% federal GST and 8% provincial PST on most purchases.
HST is the combined rate of GST and PST. For example, in Ontario, the total consumption tax (HST) is 13% (5% GST + 8% PST). In other provinces, GST and PST may be listed separately on price tags instead of being combined under HST.
Note: Each province has different rules for applying consumption taxes to various goods, meaning that some items may be tax-exempt in one province but not in another.
Property Tax in Canada
Property tax in Canada is primarily determined by the provinces and is based on the land and buildings you own. It is an important aspect of homeownership, and each province has its own rates and regulations regarding this tax.
Payroll Tax in Canada
All individuals employed in Canada who receive a salary for their work are required by law to pay payroll tax. The total payroll tax rate is essentially the same as the income tax rate, with part of the tax going to the federal government and another portion to the provincial government.
The average payroll tax rate in Canada is around 27%, but with additional charges, it can reach up to 35.3%. It’s important to note that any income beyond your base salary is also taxed at this final rate of 35.3%. For example, if you earn an additional $1,000 above your base salary, you would pay 35.3% of that amount in tax, leaving you with $647.50 net income.
However, individuals with low income are exempt from paying taxes. According to Canada’s new tax policies, the minimum taxable income is set at CAD 13,229 per year. This means that if you earn this amount or less from part-time or full-time work, you are exempt from paying taxes.
This policy provides significant support to low-income individuals and working students, offering them opportunities for growth and advancement.
Also read: Salaries and Income in Canada: Average Monthly Wages
Corporate Tax in Canada
Individuals looking to invest in Canada by purchasing or starting a business should be aware that corporations in the country are also subject to taxes. A corporation is treated as a legal entity separate from the business owner and is required to pay its own taxes.
To comply, you must first calculate the net income of your corporation and report it in the tax return. After deducting the taxes, the remaining amount can be distributed among shareholders. Each shareholder (including you as the business owner) is also required to pay taxes separately on the income or dividends received.
Under Canada’s tax policies, every corporation is treated as an individual entity that must pay taxes separately from its owners and shareholders. Corporate tax rates vary depending on the size of the business and the province. For example, in Alberta, corporations are required to pay a combined federal and provincial tax rate of 25%. However, small businesses in Alberta pay a lower rate of 15%.
Non-corporate businesses in Canada generally face lower tax rates, depending on the nature of the business. This supportive measure encourages the growth of local businesses. While the minimum corporate tax rate in Canada is set at 15%, the rate for small businesses can be as low as 9%.
Startup Tax in Canada
The Canadian government does not have a special tax calculation program for startups, but depending on the company’s financial balance and revenues, it will fall under one of the existing tax categories.
According to published statistics, the average tax rate for small businesses across various Canadian provinces is 19.8%. In comparison, small and independent businesses typically pay around 13.3%, though most startups do not operate as sole proprietorships.
Depending on your startup’s revenue level, it may be subject to the following tax rules in Canada:
- Small businesses with annual income up to CAD 500,000 typically qualify for the Small Business Deduction (SBD).
- Manufacturing and processing (M&P) businesses with annual revenues exceeding CAD 500,000 do not qualify for the federal SBD but may benefit from provincial tax reductions depending on the value they create.
- Non-M&P businesses with high revenues do not qualify for any tax reductions, exemptions, or deductions.
Note: The province of Quebec has its own unique tax rules, categorizing businesses by revenue. Based on the profit earned, businesses pay provincial income tax rates as follows: Level C – 4 to 5%, Level B – 11.5%, and Level A – 15%.
Self-Employment Tax in Canada
Many individuals in Canada work as freelancers or contractors rather than employees or business owners. This includes professionals like independent artists, athletes, and more.
Self-employed individuals are required to pay 15.3% of their net income as tax. Of this, 12.4% goes towards Social Security, and 2.9% is levied on the net income.
Cryptocurrency Tax in Canada
Until 2021, you could buy and hold cryptocurrencies like Bitcoin without paying any taxes. However, under new Canadian tax policies, cryptocurrency miners and buyers are now required to pay capital gains tax on any profits made from trading these digital assets.
It’s important to note that the Canadian government treats cryptocurrencies as commodities. There is no tax on holding the digital assets themselves, but any income earned from trading them and the amount deposited into your account is subject to tax.
Canada’s government has implemented strict regulations for cryptocurrency transactions, offering no legal loopholes for tax evasion. Additionally, if your cryptocurrency transactions exceed CAD 10,000, the exchange is required to report it to the tax authorities.
Also read: The Best Currency Exchange in Canada
Tax on Stock Trading in the Canadian Stock Market
Trading stocks in the Canadian Forex stock market can generate significant income, but all such earnings are subject to taxes. The tax rate for stock market earnings in Canada can go as high as 50%! However, incomes below CAD 200 in the stock market are exempt from taxes.
Impact of New Tax Policies on Canadian Businesses
The Canadian government enforces clear and strict tax laws, ensuring that everyone contributes their fair share. No one is exempt from taxes in Canada, and the government takes a firm stance on this matter. Despite these strict regulations, the fairness and benefit of tax laws, along with the responsible allocation of resources for citizens, have led to widespread acceptance of the tax system.
Although for those used to the tax system in Iran, these rules might seem strict and unfair, a quick comparison will show that Canada actually has much lower tax rates than many other countries, including the United States.
The relatively low tax rates in Canada, along with other financial benefits, have attracted many investors and encouraged the establishment of various businesses. The Canadian government not only offers fair and reasonable tax rates but also provides exemptions, incentives, and special tax benefits to allow startups and businesses to grow and prosper, ultimately contributing to the country’s economic dynamism.
Good tax policies have provided strong support for businesses, allowing Canada’s economy to thrive and grow, even during global recessions.
Final Thoughts
Canada’s new tax policies are designed to regulate and reduce income inequality. Although they are enforced rigorously, they ultimately benefit all groups of people and businesses.
In Canada, there are various types of taxes, which are typically collected both by provincial governments and the federal government. However, even the combined tax rates are often lower than in many other countries. In Canada, taxes are usually calculated based on your income level, with higher rates applied to those who earn more, ensuring social fairness.
Additionally, income levels in Canada are generally high enough that, even after taxes are deducted, individuals are still able to comfortably meet their living needs.
FAQs
Which provinces have the lowest income tax rates?
The provinces of Ontario, Alberta, and the northern Atlantic regions have the lowest income tax rates.
What are the tax exemptions in Canada?
According to Canadian law, incomes earned through inheritance, gifts, and lottery winnings are exempt from taxes. Additionally, retirement pensions and government subsidies are not subject to taxation. Each province may also have specific tax exemption programs.
Who is subject to taxation in Canada?
Everyone in Canada is required to pay taxes in some form. However, individuals engaged in economic activities and earning an income must pay taxes on their earnings. Businesses and corporations, as legal entities, are also subject to taxes.
