Federal taxes are collected by the Canada Revenue Agency (CRA), formerly known as "Revenue Canada" or the "Canada Customs and Revenue Agency".
Under "Tax Collection Agreements", CRA collects and remits to the provinces:
• Provincial personal income taxes on behalf of all provinces except Quebec, so that individuals outside of Quebec file only one set of tax forms each year for their federal and provincial income taxes.
• Corporate taxes on behalf of all provinces except Quebec and Alberta.
• Provincial sales taxes in New Brunswick, Nova Scotia and Newfoundland and Labrador.
The Ministère du revenu du Québec collects the GST in Quebec on behalf of the federal government, and remits it to Ottawa.
When the Canadian federation was formed in 1867, the British North America Act attempted to create a federal government with unlimited revenue gathering abilities. The federal government was entrusted with the high cost programs of the time, most notably defence and the building of railways. The provinces were given limited taxation power as they could only impose direct taxes such as sales taxes, property taxes, and income taxes (although they also maintained control over most resource revenues as well). At the time, it was believed that the provinces had adequate revenue sources as major areas of provincial government spending today were generally not funded by the government (such as social assistance and medical care).
For the early part of Canadian history most federal government revenue came from tariffs on trade with excise taxes making up the rest of the government's funding. The largest source of provincial funding was licenses, permits, and transfers of funds from the federal government. The first corporate taxes were introduced at the end of the nineteenth century.
A crisis developed during the Great Depression because the provinces were responsible for skyrocketing welfare costs, but could not raise enough revenue since the taxes permitted to the provinces were so dependent on the health of the economy. The federal government still had considerable revenues however, which resulted in a system of transfer payments between the two levels of government. The transfer payments are still in place today.
The First World War had mostly been financed by traditional means, but in 1917, a tax on income was introduced as a temporary measure to fund the war. The income tax has since become a permanent feature of the Canadian tax system. The Second World War led to dramatic change in the tax system. The percentage of Canadian government revenue from indirect taxes fell from 90% in 1913 to less than 40% by 1946. Instead, Canadians began to pay income taxes and direct taxes has since provided the greatest bulk of government funding.
Personal income taxes
Both the federal and provincial governments have imposed income taxes on individuals, and these are the most significant sources of revenue for those levels of government accounting for over 40% of tax revenue. The federal government charges the bulk of income taxes with the provinces charging a somewhat lower percentage. Income taxes throughout Canada are progressive with the high income residents paying a higher percentage than the low income residents.
Where income is earned in the form of a capital gain, only half of the gain is included in income for tax purposes; the other half is not taxed.
Federal and provincial income tax rates are shown at Canada Revenue Agency's website.
Personal income tax can be deferred in a Registered Retirement Savings Plan (RRSP), a tax sheltered savings account or mutual fund that is intended to help individuals save for their retirement.
Companies and corporations pay tax on profit income and on capital. These make up a relatively small portion of total tax revenue. Tax is paid on corporate income at the corporate level before it is distributed to individual shareholders as dividends. A tax credit is provided to individuals who receive dividend to reflect the tax paid at the corporate level. This credit does not eliminate double taxation of this income completely, however, resulting in a higher level of tax on dividend income than other types of income. (Where income is earned in the form of a capital gain, only half of the gain is included in income for tax purposes; the other half is not taxed.) Corporations may deduct the cost of capital following capital cost allowance regulations.
Starting in 2002, several large companies converted into "income trusts" in order to reduce or eliminate their income tax payments, making the trust sector the fastest-growing in Canada as of 2005. Conversions were largely halted on October 31, 2006, when Finance Minister Jim Flaherty announced that new income trusts would be subject to a tax system similar to that of corporations, and that these rules would apply to existing income trusts after 2011.
The federal government levies a multi-stage sales tax of 5% (6% prior to January 1, 2008), that is called the Goods and Services Tax (GST), and, in some provinces, the Harmonized Sales Tax (HST). The GST/HST is similar to a value-added tax.
All provincial governments except Alberta levy sales taxes as well. The provincial sales taxes of Nova Scotia, New Brunswick and Newfoundland and Labrador are harmonized with the GST. That is, a rate of 13% HST is charged instead of separate PST and GST. Both Quebec and Prince Edward Island apply provincial sales tax to the sum of price and GST. The territories of Nunavut, Yukon and Northwest Territories do not charge provincial sales tax.
Provincial and federal sales tax rates at the retail level on goods and some services are as follows:
• Alberta:......................0 + 5% = 5%
• British Columbia:..........7% + 5% = 12%
• Manitoba:....................7% + 5% = 12%
• Ontario:.......................8% + 5% = 13%
• Prince Edward Island:..10% + 5% = 15.5% (PST applied to price + GST)
• Quebec:..................... 7.5% + 5% = 12.875% (PST applied to price + GST)
• Saskatchewan:............5% + 5% = 10%
The municipal level of government is funded largely by property taxes on residential, industrial and commercial properties. These account for about ten percent of total taxation in Canada.
Both the federal and provincial governments impose excise taxes on inelastic goods such as cigarettes, gasoline, alcohol, and for vehicle air conditioners. A great bulk of the retail price of cigarettes and alcohol are excise taxes. The vehicle air conditioner tax is currently set at $150 per air conditioning unit. Canada has some of the highest rates of taxes on cigarettes and alcohol in the world. These are sometimes referred to by Canadians as "sin taxes".
Ontario levies a payroll tax on employers, the "Employer Health Tax", of 1.95% of payroll. Eligible employers are exempt on the first $400,000 of payroll. This tax was designed to replace revenues lost when health insurance premiums, which were often paid by employers for their employees, were eliminated in 1989.
Quebec levies a similar tax called the "Health Services Fund". For those who are employees, the amount is paid by employers as part of payroll. For those who are not employees such as pensioners and self-employed individuals, the amount is paid by the taxpayer.
Premiums for the Employment Insurance system and the Canada Pension Plan are paid by employees and employers. Premiums for Workers' Compensation are paid by employers. These premiums account for 12% of government revenues. These premiums are not considered to be taxes because they create entitlements for employees to receive payments from the programs, unlike taxes, which are used to fund government activities. The funds collected by the Canada Pension Plan and by the Employment Insurance are in theory separated from the general fund. It should be noted that Unemployment Insurance was renamed to Employment Insurance to reflect the increased scope of the plan from its original intended purpose.
Employment Insurance is unlike private insurance because the individual's yearly income impacts the received benefit. Unlike private insurance, the benefits are treated as taxable earnings and if the individual had a mid to high income for the year, they could have to repay up to the full benefit received.
] Health and Prescription Insurance Tax
Ontario charges a tax on income for the health system. These amounts are collected through the income tax system, and do not determine eligiblity for public health care. The Ontario Health Premium is an additional amount charged on an individual's income tax that ranges from $300 for people with $20,000 of taxable income to $900 for high income earners. Individuals with less than $20,000 in taxable income are exempt.
Quebec also requires residents to obtain prescription insurance. When an individual does not have insurance, they must pay an income-derived premium. As these are income related, they are considered to be a tax on income under the law in Canada.
Other provinces, such as British Columbia and Alberta, charge premiums collected outside of the tax system for the provincial medicare systems. These are usually reduced or eliminated for low-income people.
Since the government of Brian Mulroney in the 1980s, Canada has had no inheritance taxes. Instead, inheritance is treated as a disposal subject to the same capital gains taxation as, for example, the sale of the asset.
Canadian individuals and corporations pay income taxes based on their world-wide income. They are protected against double taxation through the foreign tax credit, which allows taxpayers to deduct from their Canadian income tax otherwise payable the income tax paid in other countries. A citizen who is currently not a resident of Canada may petition the CRA to change his status so that income from outside Canada is not taxed.
International comparison (personal income tax)
Comparison of taxes paid by a household earning the country's average wage (as of 2005)
no children Married
2 children Country Single
no children Married
Australia 28.3% 16.0% Korea 17.3% 16.2%
Austria 47.4% 35.5% Luxembourg 35.3% 12.2%
Belgium 55.4% 40.3% Mexico 18.2% 18.2%
Canada 31.6% 21.5% Netherlands 38.6% 29.1%
Czech Republic 43.8% 27.1% New Zealand 20.5% 14.5%
Denmark 41.4% 29.6% Norway 37.3% 29.6%
Finland 44.6% 38.4% Poland 43.6% 42.1%
France 50.1% 41.7% Portugal 36.2% 26.6%
Germany 51.8% 35.7% Slovak Republic 38.3% 23.2%
Greece 38.8% 39.2% Spain 39.0% 33.4%
Hungary 50.5% 39.9% Sweden 47.9% 42.4%
Iceland 29.0% 11.0% Switzerland 29.5% 18.6%
Ireland 25.7% 8.1% Turkey 42.7% 42.7%
Italy 45.4% 35.2% United Kingdom 33.5% 27.1%
Japan 27.7% 24.9% United States 29.1% 11.9%
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