What Are The Types Of Tax Laws In Canada?
Canadian citizens benefit every day from government programs and services—from the roads we drive on, the water we drink, and the heat in our homes to the doctor we visit, our child’s school, and cultural events. All these and more are paid for by the collection of taxes made by Canada’s federal, provincial and municipal governments. To fund all of these programs, utilities, institutions, and infrastructure, a variety of taxes are collected. Below is a breakdown of the different types of taxes collected in Canada.
Types of Taxes in Canada
Personal Income Tax
The federal government collects personal income taxes on behalf of all provinces and territories except Quebec, levied under the Income Tax Act. The most significant sources of revenue for the federal and provincial governments come from the collection of personal income tax, accounting for 45 percent of tax revenue. Income tax in Canada is collected according to a marginal tax rate, which is based on the amount of income earned; higher earning individuals pay a higher tax rate than do lower earning individuals.
Companies and corporations pay tax on profit income before it is distributed to shareholders as dividends. Because taxes were paid on profits at the corporate level, individual shareholders will receive a tax credit for a portion of their dividend to prevent double taxation.
Effective January 1, 2012, the net federal corporate income tax rate was 15%, or 11% for corporations able to claim the small business tax deduction. In addition, corporations are subject to a provincial income tax that may range from 0 to 16%, depending on the province and the size of the business. In Ontario, the net corporate income tax rate is 15 percent. For Canadian-controlled private corporations claiming the small business deduction, the net tax rate is 10.5%.
Corporations can reduce multiple levels of tax with the deduction of capital costs, following capital cost allowance regulations. A capital cost allowance (CCA) is the means by which Canadian businesses may claim depreciation expenses for calculating taxable income under the Income Tax Act.
Canadian residents and corporations pay income taxes based on their worldwide income. The foreign tax credit protects Canadians from paying double taxation; this allows taxpayers to deduct the tax they paid on income earned in a foreign country from their gross income. As well, non-resident Canadians may be subject to a Part XIII withholding tax, which is an additional tax levied on passive income.
Employers are required to remit various types of payroll taxes to the different jurisdictions they operate in: federally, employers must pay into Canada Pension Plan (CPP), a social insurance program allowing for the distribution of funds during an employee’s retirement. Employers must also pay into Canada’s employment insurance program, which pays benefits to Canada’s unemployed.
In Ontario, employers must also pay into the Employer Health Tax (EHT), a payroll tax that provides partial funding by Ontario employers for the Ontario Health Insurance Plan (OHIP).
Employers with a payroll less than $5 million can claim up to $490,000 in an EHT exemption as of 2019 (up from $450,000 in 2018). The EHT rates vary from 0.98% on Ontario payroll less than $200,000 to 1.95% for payroll in excess of $400,000.
The amount of EHT an employer pays is calculated by multiplying the Ontario payroll for the year – after deducting any tax exemption – by the applicable tax rate. The tax rate is based on the Ontario payroll before deducting any tax exemption.
(Ontario payroll for the year – tax exemption) x (Ontario payroll for the year before exemption x tax rate) = EHT
|Ontario Payroll (Total Remuneration)||Rate|
|Up to $200,000.00||0.98%|
|$200,000.01 to $230,000.00||1.101%|
|$230,000.01 to $260,000.00||1.223%|
|$260,000.01 to $290,000.00||1.344%|
|$290,000.01 to $320,000.00||1.465%|
|$320,000.01 to $350,000.00||1.586%|
|$350,000.01 to $380,000.00||1.708%|
|$380,000.01 to $400,000.00||1.829%|
Employers in all provinces must also pay into workers’ compensation premiums, which allocates medical benefits to employees injured during their employment.
Consumption Tax: GST & HST
The federal government levies a value-added tax of 5%, called the Goods and Services Tax (GST), and the Harmonized Sales Tax (HST) in five provinces (Ontario, New Brunswick, Nova Scotia, PEI, Newfoundland and Labrador). Currently 13% in Ontario, the HST was introduced in 2010 as a consumption tax, combining the federal goods and service tax (GST) and the regional provincial sales tax (PST) into a single sales tax. For a listing of the rate of excise tax in each province of Canada, read our article here.
Taxes on goods, whose consumption and use either harm an individual’s health or the environment are taxed by both the federal and provincial governments. Also called the “sin tax,” the excise tax is collected on goods such as cigarettes, gasoline, alcohol, and vehicle air conditioners. Canada has some of the highest rates of tax on cigarettes and alcohol in the world, constituting a substantial share of the retail total price of cigarettes and alcohol paid by consumers.
Fuel taxes were introduced in Ontario in 1925 and the carbon tax, levied on the carbon content of fuels, was introduced in 2017.
Wealth Tax: Property, Gift, & Estate Taxes
Property taxes on residential, industrial and commercial properties make up about 10 percent of Canada’s total taxation revenue; however this taxation is directed to the municipal level to pay for things like garbage removal and water systems.
Property tax is based on the appraised value of your property, including land and buildings. In Ontario, property tax for most properties is assessed by multiplying the phased-in assessment indicated on the property assessment notice by the tax rate:
- The municipal tax rate x phased-in assessment for the particular taxation year = municipal portion of tax.
- The county/regional tax rate x phased-in assessment for the particular taxation year = county/regional portion of tax.
- The education tax rate x phased-in assessment for the particular taxation year = education portion of tax.
The municipal portion of tax + county/regional portion of tax + education portion of tax = Total Property Tax.
Land Transfer Tax
Land transfer tax is a provincial tax levied when purchasing a home or land in Canada. In most provinces, the tax is calculated as a percentage of the purchase price. This one-time tax is levied on the purchasers of a property and is directed to the provincial government. In Toronto, there is an additional municipal tax. Ontario, B.C., and P.E.I. and the City of Toronto offer land transfer tax rebates for first-time homebuyers.
While a gift tax, which is the tax on money or property that one living person gives to another, has been repealed in Canada, selling items that have been gifted to you are subject to a capital gains tax. Currently 50% of realized capital gains are taxable in Canada; however, taxes on the disposition of shares in a qualified small business corporation can be offset by a lifetime capital gains exemption.
Beneficiaries of an inherited estate do not have to pay any taxes because all taxes owing have already been collected against the estate prior to its being distributed to the beneficiaries.
Taxes levied against a deceased’s estate prior to its distribution include any income tax owing in the last year the deceased was alive; non-registered capital assets, including personal belongings, cars, investments, business assets; and registered assets such as RRSPs and RRIFs.
The above constitutes the major categories of tax in Canada. There are many deductions and exemptions that a taxpayer or corporation may qualify for to reduce the total tax debt. Contact a qualified tax professional at Kalfa Law to ensure that you avail yourself of every strategy, paying as little tax as possible while staying in good standing with the CRA.
-Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.
© Kalfa Law 2019