- Taxation in Canada
The level of Taxation in Canada is average among
Organisation for Economic Co-operation and Development(OECD) countries. Approximately 70% of the Canadian government's income comes from taxation, the rest from tariffs, fees, and investments.fact|date=March 2008
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.
The "Ministère du revenu du Québec" collects the GST in Quebec on behalf of the federal government, and remits it to Ottawa.
The provincial governments of Nova Scotia, New Brunswick and Newfoundland and Labrador no longer impose a provincial sales tax and in those provinces the federal government collects goods and services tax at a rate 8% higher than in the other provinces. The additional revenue from this "harmonized sales tax" is paid by the federal government to the three harmonizing provinces.
When the Canadian federation was formed in 1867, the
British North America Actattempted 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 Depressionbecause 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 paymentsbetween 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 [http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html 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 Flahertyannounced 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
Albertalevy sales taxes as well. The provincial sales taxes of Nova Scotia, New Brunswickand Newfoundland and Labradorare 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, Yukonand Northwest Territoriesdo not charge provincial sales tax.
Provincial and federal sales tax rates at the retail level on goods and some services are as follows:
*(PST applied to price + GST)
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 Insurancesystem and the Canada Pension Planare paid by employees and employers. Premiums for Workers' Compensationare 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 Insuranceis 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 eligibility 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 Mulroneyin 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 from 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)
Deposit Interest Retention Tax
Laffer curveand the optimal tax rate argument
Registered Retirement Savings Plan(RRSP)
Revenue On-Line Service
* [http://www.ctf.ca/ The Canadian Tax Foundation]
* [http://www.fin.gc.ca/fin-eng.html The Department of Finance, Canada] - responsible for Canadian tax policy
* [http://www.cra-arc.gc.ca/menu-e.html Canada Revenue Agency] - administers tax law for the federal and most provincial governments
* [http://www.taxresource.ca Tax Resource Canada] - Provides information on individual Canadian income taxes.
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