Taxes: Federal Taxation in Canada

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Taxes taxes taxes. They are always an important topic, but especially in Canada, who has a reputation for having one of the highest tax rates in the world. But how much do Canadians really pay in taxes? First, let’s take a look at the federal level.

Taxation in Canada happens at three levels – federal, provincial, and local/municipal. The federal government has the most freedom in it’s taxation, while local taxes are the most restricted, but all taxation is required to observe the following characteristics:

  • It is enforceable by law;
  • Iimposed under the authority of the legislature;
  • Levied by a public body; and
  • Intended for a public purpose.

This is according to the Constitution Act of 18671 and the Supreme Court of Canada ruling in 19302.

The body that is responsible for federal tax collection is the Canada Revenue Agency. The CRA also collects taxes on behalf of most provinces and territories, so that there is joint collection system and taxpayers need only file a single tax return form. (The Agence du Revenu du Québec is the agency that collects taxes in Quebec on behalf of itself and the federal government. ) The CRA also “administers various social and economic benefit and incentive programs delivered through the tax system.” Some of the revenue collected by the CRA is remitted to the provinces:

  •  Provincial personal income taxes on behalf of all provinces except Quebec, through a system of unified tax returns.
  • Corporate taxes on behalf of all provinces except Quebec and Alberta.
  • That portion of the Harmonized Sales Tax that is in excess of the federal Goods and Services Tax (GST) rate, with respect to the provinces that have implemented it.5

Both the federal and provincial governments impose a person income tax, and this tax accounts for approximately 45% of their revenue and is their most significant source of revenue. The income tax is progressive, with those earning a higher income paying a higher percentage. The federal tax brackets for 2017 are as follows:

  • 15% on the first $45,916 of taxable income, +
  • 20.5% 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 $202,8006

This page on the Canada government website helps you figure out different types of income and how they are sorted for tax purposes.

Corporations also pay federal taxes. Those rates can be found here.

At the federal level there are two recipients of payroll taxes: the Canadian Pension Plan and Employment Insurance (also known as unemployment benefits, for those who have lost their job through no fault of their own). The Canadian Pension Plan is one of two major components in Canada’s public retirement income system. (The other is OAS, Old Age Security.) The Canada Pension Plan (CPP) provides contributors and their families with partial replacement of earnings in the case of retirement, disability or death. Almost all individuals who work in Canada outside Quebec contribute to the CPP.

The federal government also gets tax revenue from a value-added tax of 5% known as the Goods and Services Tax or GST. And in five provinces – New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island – there is also the Harmonized Sales Tax of 15%. The HST is used in provinces where the GST and the provincial sales tax (PST) have been combined into a single tax.

The federal and provincial governments in Canada also impose an excise tax on inelastic goods (meaning goods that continue to be consumed at the same rate regardless of changes in price) – such as cigarettes, gasoline, alcohol, and vehicle air conditioners. (These are sometimes known as “sin taxes”.) The rationale behind these taxes is that they increase health care costs.

There is also the question of whether taxation is direct or indirect. Direct taxes are the jurisdiction of the province and are levied within that province, on people who live there or conduct economic activity there. Goods for export cannot be taxed directly, and direct taxes “must not impede the flow of inter-provincial trade”3. Indirect taxes are those that are passed on, shifted from one taxpayer to another. For example, if a good is taxed indirectly, the seller of the good would pay the tax to the government, but that tax would be included in the price for the good. So the seller is passing on the price of the tax to the consumer.4

Federal tax revenue has a number of prongs. Where that money goes is even more complicated. A significant portion goes towards public health care. For more information about that, check out this report from the Fraser Institute about 2016







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