Taxation in Canada
Taxation in Canada is a prerogative shared between the federal government and the various provincial and territorial legislatures.
Legislation
Under the Constitution Act, 1867, taxation powers are vested in the Parliament of Canada under s. 91 for:The provincial legislatures have a more restricted authority under ss. 92 and 92 for:
In turn, the provincial legislatures have authorized municipal councils to levy specific types of direct tax, such as property tax.
The powers of taxation are circumscribed by ss. 53 and 54, and 125, which state:
Nature of the taxation power in Canada
Since the 1930 Supreme Court of Canada ruling in Lawson v. Interior Tree Fruit and Vegetables Committee of Direction, taxation is held to consist of the following characteristics:In order for a tax to be validly imposed, it must meet the requirements of s. 53 of the Constitution Act, 1867, but the authority for such imposition may be delegated within certain limits. Major J noted in Re Eurig Estate:
This was endorsed by Iacobucci J in Ontario English Catholic Teachers' Assn. v. Ontario , and he further stated:
Taxation vs regulatory charge
In Westbank First Nation v. British Columbia Hydro and Power Authority, the SCC declared that a government levy would be in pith and substance a tax if it was "unconnected to any form of a regulatory scheme." The test for a regulatory fee set out in Westbank requires:In 620 Connaught Ltd. v. Canada , the Westbank framework was qualified to require "a relationship between the charge and the scheme itself." This has resulted in situations where an imposition can be characterized as neither a valid regulatory charge nor a valid tax. In Confédération des syndicats nationaux v. Canada , a funding scheme for employment insurance that was intended to be self-financing instead generated significant surpluses that were not used to reduce EI premiums in accordance with the legislation. It was therefore held to be contrary to the federal unemployment insurance power under s. 91 and thus not a valid regulatory charge, and there was no clear authority in certain years for setting such excess rates, so it was not a valid tax.
Direct vs indirect taxation
The question of whether a tax is "direct taxation" was summarized by the Judicial Committee of the Privy Council in The Attorney General for Quebec v Reed, where Lord Selborne stated:"Indirect taxation" has been summarized by Rand J in Canadian Pacific Railway Co. v. Attorney General for Saskatchewan in these words:
When the definition of "direct taxation" is read with s. 92's requirement that it be levied "within the Province", it has been held that:
Licensing fees and regulatory charges
Allard Contractors Ltd. v. Coquitlam held that:Administration
Federal taxes are collected by the Canada Revenue Agency. Under tax collection agreements, the CRA collects and remits to the provinces:The Agence du Revenu du Québec collects the GST in Quebec on behalf of the federal government, and remits it to Ottawa.
Income taxes
The Parliament of Canada entered the field with the passage of the Business Profits War Tax Act, 1916. It was replaced in 1917 by the Income War Tax Act, 1917. Similar taxes were imposed by the provinces in the following years.| Province | Introduction of personal income tax | Introduction of corporate income tax | Tax collection assumed by federal government | Personal tax collection resumed by province | Corporate tax collection resumed by province | Corporate tax collection resumed by federal government |
| British Columbia | 1876 | 1901 | 1941 | |||
| Alberta | 1932 | 1932 | 1941 | 1981 | ||
| Saskatchewan | 1932 | 1932 | 1941 | |||
| Manitoba | 1923 | 1924 | 1938 | |||
| Ontario | 1936 | 1932 | 1936 | 1947 | 2009 | |
| Québec | 1939 | 1932 | 1940 | 1954 | 1947 | |
| New Brunswick | 1941 | |||||
| Nova Scotia | 1941 | |||||
| Prince Edward Island | 1894 | 1894 | 1938 | |||
| Newfoundland and Labrador | 1949 |
Municipal income taxes existed as well in certain municipalities, but such taxation powers were gradually abolished as the provinces established their own collection régimes, and none survived the Second World War, as a consequence of the Wartime Tax Rental Agreements.
Personal income taxes
Both the federal and provincial governments have imposed income taxes on individuals, and these are the most significant sources of revenue for those levels of government accounting for over 45% of tax revenue. The federal government charges the bulk of income taxes with the provinces charging a somewhat lower percentage, except in Quebec. Income taxes throughout Canada are progressive with the high income residents paying a higher percentage than the low income.Where income is earned in the form of a capital gain, only half of the gain is included in income for tax purposes; the other half is not taxed.
Settlements and legal damages are generally not taxable, even in circumstances where damages arise as a result of breach of contract in an employment relationship.
Federal and provincial income tax rates are shown at .
Personal income tax can be deferred in a Registered Retirement Savings Plan that are intended to help individuals save for their retirement. Tax-Free Savings Accounts allow people to hold financial instruments without taxation on the income earned.
Corporate taxes
Companies and corporations pay corporate tax on profit income and on capital. These make up a relatively small portion of total tax revenue. Tax is paid on corporate income at the corporate level before it is distributed to individual shareholders as dividends. A tax credit is provided to individuals who receive dividend to reflect the tax paid at the corporate level. This credit does not eliminate double taxation of this income completely, however, resulting in a higher level of tax on dividend income than other types of income.Corporations may deduct the cost of capital following capital cost allowance regulations. The Supreme Court of Canada has interpreted the Capital Cost Allowance in a fairly broad manner, allowing deductions on property which was owned for a very brief period of time, and property which is leased back to the vendor from which it originated.
Starting in 2002, several large companies converted into "income trusts" in order to reduce or eliminate their income tax payments, making the trust sector the fastest-growing in Canada. Conversions were largely halted on October 31, 2006, when Finance Minister Jim Flaherty announced that new income trusts would be subject to a tax system similar to that of corporations, and that these rules would apply to existing income trusts after 2011.
Capital tax is a tax charged on a corporation's taxable capital. Taxable capital is the amount determined under Part 1.3 of the Income Tax Act plus accumulated other comprehensive income.
On January 1, 2006, capital tax was eliminated at the federal level. Some provinces continued to charge corporate capital taxes, but effective July 1, 2012, provinces have stopped levying corporation capital taxes. In Ontario the corporate capital tax was eliminated July 1, 2010 for all corporations, although it was eliminated effective January 1, 2007, for Ontario corporations primarily engaged in manufacturing or resource activities. In British Columbia the corporate capital tax was eliminated as of April 1, 2010.
From 1932 until 1951, Canadian companies were able to file consolidated tax returns, but this was repealed with the introduction of the business loss carryover rules. In 2010, the Department of Finance launched consultations to investigate whether corporate taxation on a group basis should be reintroduced. As no consensus was reached in such consultations, it was announced in the 2013 Budget that moving to a formal system of corporate group taxation was not a priority at this time.
International taxation
Canadian residents and corporations pay income taxes based on their world-wide income. Canadians are in principle protected against double taxation receiving income from certain countries which gave agreements with Canada through the foreign tax credit, which allows taxpayers to deduct from their Canadian income tax otherwise payable from the income tax paid in other countries. A citizen who is currently not a resident of Canada may petition the CRA to change her or his status so that income from outside Canada is not taxed.If you are a non-resident of Canada and you have taxable earnings in Canada you will be required to pay Canadian income tax on these amounts. Rents paid to non-residents are subject to a 25% withholding tax on the “gross rents”, which is required to be withheld and remitted to Canada Revenue Agency by the payer each time rental receipts are paid or credited to the account of the non-resident by the payer. If the payer does not remit the required withholding taxes by the 15th day following the month of payment to the non-resident, the payer will be subject to penalties and interest on the unpaid amounts.
Payroll taxes
Employers are required to remit various types of payroll taxes to the different jurisdictions they operate in:| Jurisdiction | Type |
| Federal | |
| Ontario | Employer Health Tax |
| Quebec | |
| All provinces | Workers' compensation premiums |
Consumption taxes
Sales taxes
The federal government levies a value-added tax of 5%, called the Goods and Services Tax, and, in five provinces, the Harmonized Sales Tax. The provinces of British Columbia, Saskatchewan, and Manitoba levy a retail sales tax, and Quebec levies its own value-added tax, which is called the Quebec Sales Tax. The province of Alberta and the territories of Nunavut, Yukon, and Northwest Territories do not levy sales taxes of their own.Retail sales taxes were introduced in the various provinces on these dates:
| Province | Introduction of PST | Initial PST rate | Last PST rate | PST repealed | Conversion to HST | Conversion to QST | Reversion to PST |
| British Columbia | 1948 | 3% | 7% | 2010 | 2013 | ||
| Alberta | 1936 | 2% | 2% | 1937 | |||
| Saskatchewan | 1937 | 2% | 6% | ||||
| Manitoba | 1964 | 5% | 8% | ||||
| Ontario | 1961 | 3% | 8% | 2010 | |||
| Québec | 1940 | 2% | 9.5% | 2012 | |||
| New Brunswick | 1950 | 4% | 11% | 1997 | |||
| Nova Scotia | 1959 | 3% | 11% | 1997 | |||
| Prince Edward Island | 1960 | 4% | 10% | 2013 | |||
| Newfoundland and Labrador | 1950 | 3% | 12% | 1997 |
Current sales tax rates
Excise taxes
Both the federal and provincial governments impose excise taxes on inelastic goods such as cigarettes, gasoline, alcohol, and for vehicle air conditioners. Canada has some of the highest rates of taxes on cigarettes and alcohol in the world, constituting a substantial share of the retail total price of cigarettes and alcohol paid by consumers. These are sometimes referred to as sin taxes. It is generally accepted that higher prices help deter consumption of these items, which increase health care costs stemming from their use.The vehicle air conditioner tax is currently set at $100 per air conditioning unit.
| Jurisdiction | Fuel tax | Carbon tax | Local fuel tax | |||||||||||||||||||||||||||||||||
| Federal | 1975 | |||||||||||||||||||||||||||||||||||
| British Columbia | 1923 | 2008 | At the federal level, Canada has imposed other excise taxes in the past: Capital gains taxA Capital gains tax was first introduced in Canada by Pierre Trudeau and his finance minister Edgar Benson in the 1971 Canadian federal budget.Some exceptions apply, such as selling one's primary residence which may be exempt from taxation. Capital gains made by investments in a Tax-Free Savings Account are not taxed. Since the 2013 budget, interest can no longer be claimed as a capital gain. The formula is the same for capital losses and these can be carried forward indefinitely to offset future years' capital gains; capital losses not used in the current year can also be carried back to the previous three tax years to offset capital gains tax paid in those years. If one's income is primarily derived from capital gains then it may not qualify for the 50% multiplier and will instead be taxed at the full income tax rate. CRA has a number of criteria to determine whether this will be the case. For corporations as for individuals, 50% of realized capital gains are taxable. The net taxable capital gains are subject to income tax at normal corporate tax rates. If more than 50% of a small business's income is derived from specified investment business activities they are not permitted to claim the small business deduction. Capital gains earned on income in a Registered Retirement Savings Plan are not taxed at the time the gain is realized but they are taxed when the funds are withdrawn from the registered plan These gains are then taxed at the individual's full marginal rate. Capital gains earned on income in a TFSA are not taxed at the time the gain is realized. Any money withdrawn from a TFSA, including capital gains, are also not taxed. Unrealized capital gains are not taxed. Capital Gains on a Primary ResidencePrimary residences are exempt from capital gains. Any gains from selling a primary residence will not be considered a capital gain for taxation purposes. Any losses are also not considered, and cannot be used to offset previous, current, or future capital gains.If a property is designated as a primary residence for only a part of the time held, the exemption will only apply to any price appreciation or loss during the time it was a primary residence. Usually, any price appreciation or loss at the time of sale will be divided evenly across the time the property was held. The price appreciation or loss during the time the property was not a primary residence will be subject to treatment as capital gains. Wealth taxesProperty taxesThere are two main types of property taxes: the annual tax and land transfer tax.Annual Property Tax The municipal level of government is funded largely by property taxes on residential, industrial and commercial properties; when the municipal council determines the financial budget for the year, they predict an expected revenue that needs to be funded by property tax for municipal services and decide a municipal tax rate that will allow them to achieve the revenue amount. The annual property tax is usually a percentage of the taxable assessed value of the property which is commonly determined by the assessment service provider of the municipality. The annual property tax for any province contains at least two elements: the municipal rate and the education rate. The combination of municipal and education tax portions along with any base taxes or other special taxes determines the full amount of the tax. These taxes account for about ten percent of total taxation in Canada. Land Transfer Tax Land transfer tax is due upon the closing of a transfer of property and is calculated based on the market value of the property at a marginal tax rate, although exceptions are determined on a provincial level. Toronto has the highest land transfer tax rates in Canada as it levies an additional land transfer tax equal in value to the Ontario land transfer tax. Alberta and Saskatchewan do not charge land transfer tax. To provide relief for the high costs of land transfer tax, some provinces provide rebates for first-time home buyers: Gift taxwas first imposed by the Parliament of Canada in 1935 as part of the Income War Tax Act. It was repealed at the end of 1971, but rules governing the tax on capital gains that then came into effect include gifts as deemed dispositions made at fair market value, that come within their scope.Estate taxEstate taxes have been held to be valid "direct taxation within the province," but they cannot be charged where property is left outside the province to beneficiaries who are neither resident nor domiciled in the province. Succession duties were in effect in the various provinces at the following times:
Estate taxes, which were not subject to the territorial limitations that affected provincial taxation, were first introduced at the federal level under the Dominion Succession Duty Act in 1941, which was later replaced by the Estate Tax Act in 1958. The latter was repealed at the end of 1971. From 1947 to 1971, there was a complicated set of federal-provincial revenue-sharing arrangements, where: Upon the repeal of the federal estate tax in 1972, the income tax régime was altered to incorporate consequences arising from the death of a taxpayer, which may result in tax being owed: |