What is the Canadian Tax System

Canada’s stable political and economic system and its viable and flexible social security policy attract thousands of newcomers every year. Getting acquainted with the basic principles of the Canadian taxation system is of fundamental importance for permanent residents and citizens alike. Read below to find out where the money of the Canadian taxpayers goes and how revenues from taxation are managed by the provincial and territorial authorities and the federal government.

Taxation authorities in Canada

Canada’s main taxation body is the Canada Revenue Agency. Under the current taxation laws in the country, the agency is entitled to collect and remit to the provinces personal income taxes, corporate taxes and, in some provinces, sales taxes. It has to be noted that the provinces of Quebec and Alberta have a certain taxation autonomy, in the sense that taxation laws that apply there are slightly different than those in the rest of the country.

Canadian taxation history

It could be assumed with some certainty that the history of the Canadian taxation system began in 1867, with the formation of the Canadian federation. It is also interesting to note that at the beginning, the taxation power was to a great extent in the hands of the federal government, while the provincial government were only entitled to introduce and collect sales taxes and some other direct taxes. Nowadays, revenues from taxation account for over seventy percent of the federal government’s budget.
Types of taxes payable in Canada

According to a recent statistical information, personal income taxes account for as much as forty percent of the total taxation revenues in the country. It is also noteworthy that both, the federal and the provincial governments are entitled to impose personal income taxes that are in turn payable by all working Canadian citizens or permanent residents. However, those who earn their incomes in the form of capital gain (for instance, profit assets and other investment instruments) have only half of their personal incomes taxed. The money deposited in a registered retirement savings plan and in some mutual funds are exempt from personal income tax.

Corporate taxation in Canada
Naturally, all companies and small and medium-sized enterprises operating in Canada pay taxes to the federal government, which fall in two general categories: taxes on profit income, and taxes on capital. Note that corporate income is taxed prior to its distribution among the shareholders in the form of dividends, which in turn are taxed as personal incomes. The catch here is that incomes from dividends are subject to higher taxes compared to some other types of personal incomes. In order to alleviate this double taxation, some companies have re-registered as income trusts.

Taxes on sales
Instead of a value added tax (VAT), the Canadians have a Goods and Services Tax which is currently set at five percent - (in some provinces it is 15% cumulative tax also known as Harmonization Sales Tax). For comparison, the VAT rate in some European Union member states is as high as twenty percent.



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