Canada tax system

Administrative Decisions

General information

The obligation to pay income tax is based on the concept of permanent residence. Moreover, in accordance with the Income Tax Act, a Canadian resident is considered to be every person who has lived in the country for more than 183 days. Canadian residents are taxed worldwide income, while a non-resident person pays tax only on wages earned in Canada, entrepreneurial income related to Permanent business in Canada, and from capital gains on disposal of Canadian taxable property. For individuals, the tax year usually corresponds to the calendar year, that is, from January 1 to December 31. For societies, the tax year usually corresponds to their fiscal year. The tax year covers the period from January 1 to December 31.

An individual must submit his income statement no later than April 30 after the end of the tax year (or before June 15 if the same individual owns an individual enterprise) as he or she receives taxable income. Companies registered in Canada are required to submit a declaration of income no later than six months after the end of their tax year. If an overdue declaration is submitted or income is withheld, punitive measures may be taken.

History

In Canada, federal income tax was established in 1917 under the Military Income Tax Act . This law was subsequently superseded by the Income Tax Act , published in 1948. In 1952, this law was included in the general revision of legislation. The Carter Report was presented in 1965, examining the Canadian taxation regime in its entirety and proposing significant changes to tax policies and tax treaties between the federal government and the provinces. Subsequently, the law was subjected to numerous alterations, including the reform of 1971, which introduced certain recommendations to the Carter Report. After that, the Law on Income Tax is subjected to numerous annual changes, the main of which are announced by the Minister of Finance when introducing the draft budget.

You can imagine the general features of the federal income tax law by setting out the rules on taxpayers and the basic principles of their duties and their taxable income.

Application to Societies

In accordance with Canadian law, companies are considered legal entities and are taxed. By law, there are a number of categories of companies, in particular:

1. private society;
2. private society under Canadian control;
3. state society.

The general tax regime, as well as the tax rate, vary depending on the type of company.

Partnerships (contractual partnerships; more precisely, full partnerships and faith partnerships) are not legal entities and, therefore, are not taxpayers. Meanwhile, the income tax law provides that a partnership must calculate its income as if it were a legal entity. Once this income is determined, the members of the partnership must pay tax on the portion of the partnership's income that is due to them.

Trust is neither a person nor a taxpayer. Meanwhile, the law provides that trust will be considered an individual in order to establish income tax. The trustee is responsible for paying this tax.

Calculation of taxable income

The law distinguishes income by its nature, or source. Thus, they distinguish between income from paid work or service (only for individuals), property income, entrepreneurial income, and capital gains. Some other amounts are included in income simply by virtue of the Law. In principle, income not derived from any of these sources is tax deductible. In this case, they talk about random profit (for example, winning the lottery).

Only 50% of capital income is taxable.

Income from paid work or service includes wages and all benefits associated with employment.

Income from property or from an enterprise is primarily determined as profit from property or enterprise. This profit is determined on the basis of existing commercial principles. In general (but not always), these principles are consistent with generally accepted accounting principles. Meanwhile, this profit must be changed so as to comply with the numerous special rules for determining income provided for in the Law.

Property income includes interest, dividends, rents and rents. Meanwhile, these types of income may relate to entrepreneurial income, if they are obtained in the conditions of the enterprise.

Expenses incurred to obtain property or business income are included in the cost to the extent that the Law establishes this.

Capital expenditures as capital expenditures can be amortized and deducted in accordance with the rules provided for in the Law in this regard.

A taxpayer suffering a loss in a tax year will be able to transfer it to another tax year and deduct it when calculating his taxable income. There are various types of losses, among which there are capital losses and other losses.

In certain situations, the Law provides for exemption from capital gains tax, in particular exemption from capital gains tax concluded in shares of small enterprises, with a maximum deduction of $ 750,000. (This applies only to individuals, excluding trust).

The law distinguishes between actual income (usually called net income) and taxable income. The tax is calculated on taxable income. Taxable income corresponds to net income over which certain adjustments have been made. So, taxable income of a taxpayer corresponds to his net income calculated for the year, minus the balance of other losses incurred during previous tax periods and carried forward to this tax year.

Federal Tax Calculation

Personal income tax is calculated through progressive rates. (But: Only Alberta has adopted a flat rate for the provincial income tax on individuals). Certain tax credits may be used to reduce the amount of tax payable.

Progressive rates applied at the federal level since 2012

Company rates

Unlike individuals, societies have a more complex decreasing scale. So, the base rate is 38%. However, with loans, the real rate ranges from 13% to 22%. For example, a private company under Canadian control, with a taxable income of less than $ 500,000, and a company operating permanently only in Quebec, can get a loan of 16% and a provincial tax deduction of 10%.

In addition, all societies are subject to an additional 4% tax, added to the base rate after the provincial deduction, if any.

Companies, like individuals, are subject to federal income tax and the provincial income tax in which they have permanent enterprises.

The tax on products and services , also known for its reduction (NPU), is a value added tax that is distributed between the federal budget and the budgets of provinces and territories. Depending on the territory, the federal rate is 5, 6, 7%. Provinces and territories also apply consumption tax. In some provinces, such as Quebec, we are talking about a value-added tax similar to a federal NHRI, but applied after (hidden additional tax). Other provinces still collect a simple sales tax.

Municipalities and school commissions in Canada usually collect property taxes. Municipalities and school commissions are subject to provincial jurisdiction, so these taxes are levied on the basis of provincial laws.

Non-Resident Persons and Income Taxes

Generally speaking, non-resident individuals earning property income in Canada must pay a 25% tax, applicable to the net amount of payments they made. It is envisaged that the Canadian payer must himself withhold tax from these payments made to non-residents abroad. This rate may be reduced based on the terms of the international tax agreement. In some cases, the payment of dividends now provides that no tax will be neither withheld nor payable.

In addition to property income received from Canada, there are three situations that oblige a non-resident person to pay tax in Canada:

1. salary in Canada;
2. disposal of certain property referred to as “Canadian taxable property”;
3. managing a permanent enterprise.

Death and Inheritance

Inheritance tax does not exist. Meanwhile, at the time of his death, an individual is considered to have all his property at market prices and the inheritance becomes the subject of taxation, from which it is necessary to pay a tax on capital gains.

Exemptions

Certain individuals or entities in Canada are exempt from taxes. These are, for example, foreign government employees at work in Canada, city administrations, trade unions and pension fund management societies. Salaries received from the duties of the Governor General of Canada are also not tax deductible. Non-profit organizations are also exempt from income tax.

Federal spending authority

In his political work “Subventions fédérales-provinciales et le pouvoir de dépenser du Parlement canadien” P.E. Trudeau claims that the authority to spend is the competence of the Canadian Parliament, by virtue of which he is allowed to spend funds in the lands of states for which subjects he does not have to has the power to make laws. Professor F.R. Scott takes a position in favor of a theory based on the royal prerogative of giving. In turn, the Canadian Bar Association argues that this power is based on Articles 91 (3) and 102 of Constitutional Act 1867. In addition, in his article “Spending power”, E. A. Dridger proposes a theory of power to spend based on the articles 102 and 106 of Constitutional Act 1867, which he compares with Section 81 of the Australian Constitution. The powers to spend become the subject of lively discussions, as they are not mentioned in the constitution. The provincial commission even introduced the concept of tax imbalance, which contradicts the principles of tax authorities, which aim to allow the concentration of funds instead of their redistribution.

• Canada Revenue Service
• Canada Income Tax Calculation