Keith Mack
Tax law in Canada is a shared prerogative between the federal government and various provincial and territorial legislatures. The Parliament of Canada has taxation powers under the Constitution Act, 1867, which are also delegated to the provincial legislatures to varying degrees. Both income and capital gains are taxable in Canada, with income tax applying to all business, property, and employment income. Federal income taxation is governed by the ITA, while each province also imposes its own income taxes. Tax rates vary depending on the province and the type of income, with combined federal and provincial income tax rates ranging from 23% to 31% for non-CCPCs in 2022. Non-residents of Canada are generally taxed on their sources of income within the country, with certain tax treaty concessions.
| Characteristics | Values |
|---|---|
| Taxing authority | Federal government and provincial and territorial legislatures |
| Taxing powers | Vested in the Parliament of Canada under s. 91(3) of the Constitution Act, 1867 |
| Provincial legislature authority | More restricted under ss. 92(2) and 92(9) of the Constitution Act, 1867 |
| Tax types | Income tax, capital tax, property tax, shop tax, saloon tax, tavern tax, auctioneer tax, etc. |
| Tax considerations | Federal and provincial tax considerations for businesses |
| Tax residency | Residents taxed on worldwide income; non-residents taxed on Canadian-source income |
| Tax rates | Varying provincial taxes ranging from 8% to 16% for general active business income |
| Tax treaties | Tax treaty concessions and tax treaty reductions for non-residents |
| Tax filing | EFILE and NETFILE options available for non-residents |
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What You'll Learn
Federal and provincial tax considerations for non-residents
Canada's tax system is similar to that of many countries. Employers and other payers usually deduct taxes from the income they pay, whereas individuals with business or rental income usually pay their taxes in instalments. Each year, you must determine your final tax obligation, and depending on your situation, you may be required to complete a tax return and send it to the Canada Revenue Agency (CRA). On the return, you report your income and claim your deductions, calculate your federal and provincial or territorial tax, and determine if you have a balance of tax owing for the year, or a refund of some or all of the tax.
Canadian residents are subject to tax on their worldwide income, while non-residents are generally taxed on their sources of income within the country. Non-residents are subject to Canadian income tax on most Canadian-source income paid or credited to them during the year, unless it is exempt under a tax treaty. The type of tax paid and the requirement to file an income tax return depend on the type of income received.
Non-residents who receive income from employment or business in Canada should use the income tax package for the province or territory where they earned the income, along with Guide T4058, Non-Residents and Income Tax. If they receive other types of income, such as capital gains, scholarships, fellowships, or research grants, they will also need Form T2203, Provincial and Territorial Taxes for Multiple Jurisdictions. If they only receive other types of taxable Canadian-source income, they should use the Income Tax Package for Non-Residents and Deemed Residents of Canada.
Provincial taxes vary from 8% to 16% for general active business income and are only applicable if a corporation has a permanent establishment in that province. If a corporation has business income attributable to permanent establishments in more than one province, such income is shared across all locations and is subject to taxation in each of those provinces.
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Income tax requirements for residents
In Canada, income tax requirements are based on an individual's residency status.
To be considered a resident of Canada, an individual must have significant residential ties to the country and have lived there for 183 days or more in a tax year. If an individual meets these criteria, they are considered a resident for the entire tax year and are subject to tax on their worldwide income.
For residents, the income tax requirements in Canada include paying taxes on all sources of income, including business, property, and employment income. Both income and capital gains are taxable, with 50% of capital gains included in taxable income and 50% of capital losses allowed to be offset. Residents typically have taxes deducted from their income by employers or payers, and they may also be required to pay taxes in instalments. At the end of the tax year, residents must determine their final tax obligation and may need to complete and send a tax return to the Canada Revenue Agency (CRA). On the return, residents report their income, claim deductions, calculate federal and provincial or territorial tax, and determine if they owe additional tax or are owed a refund.
It is important to note that residency status can be complex, and individuals with ties to multiple countries should carefully review the relevant tax laws and consult official sources or experts for specific guidance.
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Provincial income tax rates
Canada has a federal system of government, which means that while there is a national government, each province also has its own government with its own tax laws. This means that, in addition to federal income tax, individuals in Canada must also pay provincial income tax. The provincial income tax rate that an individual pays is determined by where they live at the end of the tax year, which is December 31.
Provincial tax brackets and the rates that apply to those brackets vary. For example, in 2024, someone who lived in British Columbia and earned $60,000 in taxable income would pay a 5.06% tax rate on their first $47,937 and 7.7% on the remaining $12,063 of their income, rather than 7.7% on the full $60,000.
Provincial and federal income tax rates are not combined, but the resulting amounts of income taxes owed are combined to determine the overall amount of income tax to be paid. To calculate the total amount of tax owed, an individual must first calculate their federal taxes, and then calculate their provincial taxes and add them together. This can be done by filling out a tax return on paper or by using tax software.
The federal government collects provincial taxes and fees through the Canada Revenue Agency in all provinces and territories except Quebec, which handles its tax collection through Revenu Québec. This means Quebec residents must file separate federal and provincial tax returns every year. While federal income tax rates apply to all Canadians, each province and territory determine its own distinct tax credits, tax rates, and tax deductions. Except for Quebec, all provinces use the federal government's definition of taxable income.
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Taxation powers of the federal government
Taxation in Canada is a shared prerogative between the federal government and the various provincial and territorial legislatures. The federal government's taxation powers are outlined in the Constitution Act of 1867, specifically in section 91(3), which grants it the authority to raise money through any mode or system of taxation.
The federal government's taxation powers include the power to levy income tax on individuals and corporations. This includes both residents and non-residents of Canada, with different rules applying to each group. For example, while Canadian residents are taxed on their worldwide income, non-residents are typically only taxed on their Canadian-source income, such as income earned from a business or property located in Canada.
The federal government also has the power to impose specific types of taxes, such as the Business Profits War Tax, which was introduced in 1916, and was later replaced by the Income War Tax Act in 1917, covering personal and corporate income. The federal government also has the authority to implement tax treaties with other countries, which can impact the taxation of non-residents.
In addition to income tax, the federal government also has the power to levy other types of taxes, such as excise taxes, import duties, and sales taxes. These taxes can be applied to a range of goods and services, and the revenue generated is used to fund various government programs and services.
The federal government's taxation powers are not unlimited, however, and they are circumscribed by sections 53 and 54 of the Constitution Act, which require any bill that imposes a tax to originate with the legislature and outline certain restrictions on the appropriation of tax revenue.
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Taxation powers of provincial and territorial legislatures
Taxation in Canada is shared between the federal government and the various provincial and territorial legislatures. The Constitution Act of 1867 outlines the distribution of legislative powers between the Parliament of Canada and the provincial legislatures. Sections 91 to 95 of the Constitution Act detail the powers of the Parliament of Canada, which can enact legislation that applies to the entire country. The provinces, on the other hand, have their own areas of jurisdiction outlined in the Constitution Act.
The provincial legislatures have taxation powers under ss. 92(2) and 92(9) of the Constitution Act, which include direct taxation within the province for raising revenue for provincial purposes. This includes estate taxes, which are considered "direct taxation within the province". Provincial legislatures can also levy specific types of direct taxes, such as property tax, and indirect taxes, such as license fees. Provincial taxes vary from 8% to 16% for general active business income and are applicable if a corporation has a permanent establishment in that province.
The provinces also have authority over natural resources, local works and undertakings, property and civil rights, and matters of a local or private nature. They can regulate trade and commerce within their respective territories. The provincial legislatures have also authorized municipal councils, which are established by the provincial legislatures, to levy certain types of direct taxes.
While the territories do not have constitutional powers in their own right, the Parliament has delegated much of its power to the territorial legislatures through devolution. The territorial legislatures have comparable powers to the provinces in certain areas, such as education and human rights laws.
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Frequently asked questions
In Canada, taxation is a prerogative shared between the federal government and the various provincial and territorial legislatures. Federal income taxation is governed by the ITA, while the provinces also impose their own income taxes.
Non-residents of Canada are taxed on their sources of income within the country. The type of tax and the requirement to file an income tax return depend on the type of income received. Non-residents usually pay Part XIII or Part I tax on Canadian income.
Canadian residents are subject to tax on their worldwide income. An individual who stays in Canada for 183 days or more during a year will be deemed a resident of Canada for that entire year.
The combined federal and provincial income tax rates for corporations vary depending on factors such as the type of business income and whether the corporation is Canadian-controlled. In 2022, the combined federal and Québec/Ontario rate for non-Canadian-controlled private corporations was 26.5% for active business income.
