During my recent visit to Southern India, particularly, Tamil Nadu, my family doctor having many covenanted degrees in Medicine from Canada, mentioned about the high income/other atax rates in Canad and also their social commitments to take extra care of the welfare of their citizen. It created a curiosity in me to study the income tax in Canada Vis-à-vis U S A, their neighbor who basically differs from everything since Canada has a greater say with French culture than its closest neighbor, U.S.A. Let us study the income tax system in Canada, at least its basic features. Several of my earlier articles on U.S.A., Taxation may be referred for comparison and stark separation.

Income tax in Canada

The basic website for authorized income tax information about Canada is http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html,

Popularly known as Canada Revenue Agency.

Let us look at federal income tax rate for an individual in Canada.

Federal tax rates for 2017

  • 15% on the first$45,916 of taxable income, +
  • 5% on the next $45,915 of taxable income (on the portion of taxable income over $45,916 up to $91,831), +
  • 26% on the next $50,522 of taxable income (on the portion of taxable income over $91,831 up to $142,353), +
  • 29% on the next $60,447 of taxable income (on the portion of taxable income over $142,353 up to $202,800), +
  • 33%of taxable income over $202,800.

Canada consists of 13 provinces or territories which are as under:

  • Newfoundland and Labrador
  • Prince Edward Island
  • Nova Scotia
  • New Brunswick
  • Quebec
  • Ontario
  • Manitoba
  • Saskatchewan
  • Alberta
  • British Columbia
  • Yukon
  • Northwest Territories
  • Nunavut

The regional provinces too demand income tax and one of the demands from Ontario is given as under:

5.05% on the first $42,201 of taxable income, +
9.15% on the next $42,203, +
11.16% on the next $65,596, +
12.16% on the next $70,000, +
13.16 % on the amount over $220,000

One who is serious to know the income tax of any other province can easily go to the web site of the province and learn about its taxes. ( http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html)

Let us look in depth form T 1 General 2016 for clear understanding of the income tax. It is a 4-page form with 6 steps, as they call them.

  • Step 1 is known as identification and other information. Expectedly, it requires basic information such as name, mailing address, city and country. Titled information about tax payer, it requires tax payer’s social insurance number, date of birth, marital status, information about spouse or common-law partner, citizenship, residency status, and holding of foreign property.
  • Step 2 is known as total income. It requires information on 32 columns. Prominent ones are employment income, wage loss replacement contributions, other employment income, old age security pension, CPP or QPP benefits (CPP- Canada Pension Plan; QPP-Quebec Pension Plan), universal child care credit benefit, employment insurance and other benefits, taxable amount of dividends, interest and investment income, net partnership income; limited or non-active partners only, rental income, taxable capital gains, RRSP income from T4RSP slips, self-employment income like business income, professional income, commission income, farming income or fishing income etc.
  • Step 3 is known as net income. Common sense strikes and resonates with various deductions like pension adjustment, PRPP employer contributions, universal child care benefit repayment, disability supports deduction, business investment loss, both gross and allowable deduction, deduction for CPP or QPP contributions on self-employment and other earnings, clergy residence deduction, social benefits repayment to arrive at net income. Vast difference from American taxation.
  • Step 4 is known as taxable income.  To arrive at taxable income, a few more deductions like employee’s home relocation loan deduction, Canadian forces personnel and police deduction, security options deduction, limited partnership losses of other years, non-capital /net-capital losses of other years, capital gains deduction and northern resident’s deductions also have a role. Quoting directly from form T1, line 236 minus line 257 reflects the taxable income of the tax payer.
  • Step 5is known as Federal tax and provincial or territorial tax. Rightfully it directs the tax payer to use Schedule 1 to calculate the federal tax and form T 2203 to calculate the provincial or territorial tax, if applicable. I could hear your murmur that there seems to be too much tax either at federal level and also at provincial or territorial level but let us not forget that Canada, as a nation just loves its citizen and virtually takes care of all the needs of its citizen, either young, old, disabled or parents of kids maintaining its position as one of the most patronizing societies in the world. During one of my visits to Canada, I have heard the above saying several times from its citizen.
  • Step 6 ultimately leads one to arrive at either the refund or balance owing of taxes for the tax One can look at the tax form T1 page 4 to know the intricate details of various credits, tax paid by installments etc. to arrive at the final result.

Now the most interesting aspect of Canadian income tax by the way of raising various questions and the resultant answers may be laid down as under:

  • Any employee may ask me what does form T4 contain, and how will it help for preparation of income tax? Yes, it is having 19 boxes. (10,12,14,16,17,18,20,22,24,26,28,29,44,46,50,52,54,55, and 56) containing information of employment income, social insurance number, employee’s account number, province of employment, income tax deducted, employee CPP/QPP contributions, charitable contributions etc. The interested reader can easily refer to the attachment of Form T4 for a detailed study. As I have already stated in many of my articles, any young Indian is entitled to know at least minimum income tax information about any of the leading nations where they have now the ability to contribute substantially to their economies due to their enormous talents which are among the best in the world. Factually T4 is one of the prime tax stubs to be given to any employee from Canada which contains the details of full year salary details.

A Tax payer must file a return for 2016 if:( quoting from Canada Revenue Agency instructions)

  • Tax payer has to pay tax for 2016.
  • The Revenue Agency has sent a request to file a return.
  • Tax payer and his/her spouse or common-law partner elected to split pension income for 2016. See lines 115, 116, 129, and 210.
  • Tax payer received working income tax benefit advance payments in 2016.
  • Tax payer disposed of capital property in 2016 (for example, if he/she sold real estate, the principal residence, or shares) or has realized a taxable capital gain (for example, if a mutual fund or trust attributed income to him/her or reporting a capital gains reserve claimed on 2015 tax return).
  • Tax payer has to repay all or part of the old age security or employment insurance benefits. See line 235.
  • Tax payer has not repaid all amounts withdrawn from the registered retirement savings plan (RRSP) under the Home Buyers’ Plan or the Lifelong Learning Plan. For more information, to refer cra.gc.ca/hbp or see Guide RC4112, Lifelong Learning Plan (LLP).
  • Tax payer has to contribute to the Canada Pension Plan (CPP).

Alternately, a tax payer may have to file a tax return to claim tax refund, receive the goods and services tax/harmonized sales tax credit, continue to receive Canada child benefit payments or to carry forward or transfer the unused part of tuition, education and text book amounts.

Generally, the tax return for 2016 has to be filed on or before April 30, 2017 in case of individuals and June 15, 2017 in case the tax payer or the common-in law partner had carried out a business. However, the taxes owed would have to paid by April 15, 2017.

For one delaying the tax overdue by the date conveyed in earlier para, a late filing penalty of 5% of the balance due along with 1% of balance due for each month up to a maximum of 12 months till the taxes are paid. It is a huge fine which any tax payer would love to avoid by filing the return on time. What if, if he/she is not in a position to pay in one go?

 The tax payer may have to pay the taxes by installments if not enough income tax had not been withheld from the income, and the net tax owing is over $3,000 ($1,800 if he/she were a resident of Quebec) in more than one year. If the records show that taxes have been by installments, the tax payer will be advised on the notice of assessment. Later, if the tax authorities determine that the tax payer probably should be making installment payments, Form INNS1, Installment Reminder, or an email notification, will be sent if the tax payer had signed up for this service at cra.gc.ca/my account.

NET FILE is a secure service that allows the tax payer to file the income tax and benefit return electronically using a tax preparation software or a web tax application. For a list of available software and applications, including free ones, one can go to cra.gc.ca/net file software. Most individuals are eligible to use NET FILE. For more information or to file the tax return, one may go to cra.gc.ca/net file.

EFILE  

EFILE is a secure service that lets authorized service providers, including a discounter, complete and file your return electronically. For more information go to cra.gc.ca/efile- individuals.

We have never heard the word “common-in law partner” in any of our discussions on international tax matters.

“common-in law partner” is defined as under by Canada Revenue Agency:

This applies to a person who is not your spouse, with whom you are living in a conjugal relationship, and to whom at least one of the following situations applies. He or she: a) has been living with you in a conjugal relationship, and this current relationship has lasted at least 12 continuous months; Note In this definition, 12 continuous months includes any period you were separated for less than 90 days because of a breakdown in the relationship. b) is the parent of your child by birth or adoption; or c) has custody and control of your child (or had custody and control immediately before the child turned 19 years of age) and your child is wholly dependent on that person for support.”

Since I have actually quoted directly from official communication, it has not been paraphrased. The word “you” indicates the tax payer.

Tit bits to help the tax payer as given by Canada Revenue Agency

  • To get step by step instructions to complete the tax return, the tax payer may go to cra.gc.ca/guide-get ready
  • To get information about certified software, the tax payer may go to cra.gc.ca/guide-net file
  • To help tax payers who are eligible to get help from volunteer due to economic considerations, the tax payer may go to cra.gc.ca/guide-volunteer

Conclusion

Let me make my position very clear that this article arose because of my curiosity to know the minimum knowledge about the income tax for individuals in Canada as compared to U S A about which I have written extensively in my earlier articles. It is interesting to know that the income tax rates vary between 15% to 33% in case of federal taxes while the income tax for Ontario province vary between 5.05% and 13.16%. As compared to any other country, it may look to be very steep but as emphasized repeatedly in this article, Canadian government virtually takes care of most of the requirements like free medical facilities, free education, elderly care and other benefits for its citizen, which is an envy for any other country.

Canadians with whom I had discussions during my visit to Quebec, Ontario and other provinces had shown strong liking for the activities of its governments at federal/provincial levels. I hope, this article basically satisfies some information about income tax for individuals in Canada and my ardent advice for a serious tax payer is to approach a CPA to complete the tax return who would take care of his/her tax requirements almost completely.

 Like myself, the reader of this article is also requested to visit Canada to view its natural beauty at Niagara Falls and other places of interest. Obviously, you will understand the tax structure incidentally too!

Reference

  • Canada Revenue Authority web site http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html,
  • Form T1 for 2016, http://www.cra-arc.gc.ca/E/pbg/tf/5006-r/5006-r-16e.pdf
  • Form T 4 for 2016, http://www.cra-arc.gc.ca/E/pbg/tf/t4/t4flat-14b.pdf
  • Ontario tax return or other assistance, its website, http://www.cra-arc.gc.ca/ndvdls-fmls/menu-eng.html
  • The main purpose of giving various websites is to get the most authentic information from government bodies who do not hesitate to assist in case of any help.
  • Canadian income tax rates for individuals, (all provinces) can be learnt at web site,

http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html

About the author : Subramanian Natarajan C.P.A. (USA), M.Sc., CAIIB took voluntary retirement in 2000 from Punjab National Bank after handling various facets of banking like deposit mobilization, foreign exchange, auditing and borrower accounts. After living in USA for 12 years during which period he worked in international auditing firms specializing in international tax, auditing, IFRS etc., he continues his practice in New Delhi, India. He can be reached at subcpa@gmail.com. Tel: 7503562701, 9015613229. He currently lives in Delhi. His name appears as tax consultant in web site of American embassy, New Delhi. He is thankful to various suggestions received from readers and is delighted to see the enormous enthusiasm of readers.

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