Taxation Principles

Taxation Framework

  • Taxes are mandatory obligations by federal, provincial, and municipal governments on earnings, investment income, property, imports, and sales and services.

  • Federal taxes fund defence, OAS, and CCB.

  • Provincial taxes fund education and health care.

  • Municipal taxes fund local services like police, fire, and sanitation.

Canadian Tax System

  • Federal and provincial governments collect income and commodity taxes.

Personal Income Tax

  • Levied on total income net of deductions and credits.

  • Based on taxable income (income less eligible expenses and deductions).

  • Taxable income includes salaries, wages, commissions, business net income, certain benefits, interest, dividends, and capital gains.

  • Capital gain: increase in monetary value of capital asset (shares, land) resulting in profit on resale.

Federal Income Taxes

  • Graduated federal tax rates: percentage paid depends on taxable income.

  • Most individuals file a federal income tax return with the CRA if they owe taxes, contribute to CPP/QPP, or have taxable capital gains.

  • Up-to-date federal rates are on the CRA website; example 2024 rates are provided.

  • Corporations pay 15% or 9% federal tax; lower rate for CCPCs eligible for the small business deduction.

Provincial Income Taxes

  • Individuals also pay provincial income taxes.

  • Criteria and forms vary by province (except Québec, which has its own).

  • Provinces have graduated tax rates and may offer credits for seniors or low-income individuals.

Commodity Taxes

  • Include GST, PST, and HST, plus excise taxes and duties.

Exemptions

  • HST is charged against most goods and services.

  • Exemptions may be zero-rated or exempt, and include basic foods, prescription drugs, medical devices, healthcare, financial transactions, residential rent, wages, and insurance premiums.

  • Insurance premiums are generally exempt from HST, however, provinces can tax certain types of insurance (group insurance).

Withholding Taxes

  • Taxes withheld by the payer and submitted to the government as a credit against the payee’s income tax.

  • Applied to withdrawals from RRSPs, employment income, benefits from RPPs/DPSPs, and payments from RRIFs.
    10% (5% for Québec) on amounts up to $5,000 20% (10% for Québec) on amounts over $5,000 up to $15,000; and
    30% (15% for Québec*) on amounts over $15,000.
    In Québec, there is an additional amount of 14% that will be withheld by financial institutions and insurance companies. This amount will be paid to Revenu Québec.

Foreign Withholding Tax

  • May apply to dividends from foreign companies; rates vary.

  • May be used to reduce Canadian tax via a foreign tax credit.

  • Tax treaties may waive or reduce withholding tax on income from RRSPs/RRIFs, but not TFSAs/RESPs/RDSPs.

Withholding Taxes on Assets Owned by Non-Residents

  • Required on assets paid to or owned by non-residents, including pension, annuity, and insurance policy payments.

  • Insurers withhold tax when non-residents dispose of policies issued when they were Canadian residents.

Self-Assessed Tax System

  • Individuals voluntarily fill out tax returns and report income.

  • Taxpayers calculate how much they owe or are entitled to receive as a refund.

Canada Revenue Agency (CRA) Audits

  • Audits are used to maintain public confidence

  • Returns are selected for review from computer-generated lists, audit projects, leads, and secondary files.

  • Taxpayers are entitled to discuss the proposed adjustments with the auditor, accountant, or lawyer and also to provide additional information.

Statutory Limits on Audits

  • Normal reassessment period is three years after the CRA sends its notice of assessment (four years for mutual fund trusts and corporations).

  • Exceptions exist for fraud, gross negligence, or to offset a loss (extends to six years).

Retention of Records

  • Taxpayers must keep records, books, and vouchers for six years from the end of the tax year.

General Anti-Avoidance Rule (GAAR)

  • Prevents transactions designed specifically to obtain an inappropriate tax benefit.

  • CRA combats tax avoidance through regular reviews, monitoring trends, updating strategies, and communicating with the Department of Finance.

Filing Tax Returns

Fiscal Year and Tax Reporting Year-End

  • Individuals file T1 returns based on the calendar year, including self-employed individuals.

  • The term “fiscal year” refers to the reporting period of a corporation, at most 12 months.

  • Corporations’ fiscal year-end does not have to be December 31 - Returns are due six months after their tax year end.

Canada and the United States (U.S.)

  • Canadian citizens with U.S. citizenship or Green Cards must file U.S. tax returns.

  • Double taxation is generally avoided through tax credits due to international tax treaties.

  • RRSP tax deferral benefits may not be available to U.S. citizens; income earned in TFSAs is taxable for U.S. tax purposes.

Types of Income

Total Income

  • Includes employment income, pension, disability benefits, EI, dividends, interest, and RRSP/RRIF income.

  • Exclusions: death benefits, GST/HST credits, child assistance payments, lottery winnings, GIS, certain awards, etc.

Net Income

  • Calculated as total income less specific deductions.

  • Deductions examples Registered pension plan or RRSP contributions; child care expenses; disability support, business investment loss; moving expenses; support payments made, excluding most child support payments; carrying charges and interest expenses; Canada Pension Plan (CPP) contributions on self-employed earnings; and Social benefits repayments.

  • Used for certain calculations like child tax credit and GST/HST credit.

Taxable Income

  • Net income after certain additional deductions.

  • Used to calculate federal tax and may be required on provincial tax forms.

Marginal and Average Tax Rates

  • Marginal tax rate: rate applied to each additional dollar of income depending on tax bracket.

  • Average tax rate: the percentage of each dollar of income paid as tax. (lower than marginal tax rate.)

Deductions and Credits

  • Deductions reduce income used to calculate gross tax payable.

  • Credits reduce the calculated gross tax payable

Difference Between a Deduction and a Credit

  • RRSP contributions are an example of a deduction.

  • Personal amount : Each taxpayer claims 15,705^{16} (2024) as a personal amount, while people 65 years
    of age or older with income below 44,325 claim an additional age amount of 8,790

  • Federal non-refundable tax credit rate is 15%.

Refundable and Non-Refundable Credits

  • Refundable credits provide payments even if taxes are reduced to zero (e.g., GST/HST credit).

  • Non-refundable credits can't reduce taxes below zero.

Widely Used Credits

  • labour-sponsored funds tax credit

  • Canada Pension Plan (CPP) or Québec Pension Plan (QPP) basic contributions for employment income (federal).

  • employee Employment Insurance contributions (federal); and

  • the pension income amount.

Tax Reporting in the Year of Death

Rules for Legal Representatives

  • A legal representative is responsible for administering and distributing assets of the states of the deceased

  • Responsibilities: providing the CRA the deceased’s date of death,
    stopping or, in some cases, transfer certain benefits the deceased was receiving.
    If death occurs between January 1 and October 31, the final tax return is due April 30 of the the following year.
    If death occurs between November 1 and December 31, the return is due six months after the date of death.

Definition of Probate

  • The process to certifying a will to be the deceased’s last valid will and through which an estate’s executor, receives approval from a court to obtain and distribute assets.
    With the exception of Québec, probate fees in Canada fees are charged based on the fair market value of assets passing through a probated will.

  • Insurance policies that have named beneficiaries are exempt from probate.

Estate Taxation

  • CRA considers disposition occurs at death.

  • RRSPs and capital assets are deemed sold at fair market value.

Spousal Deferrals

  • Spousal rollover: assets go to surviving spouse at deceased's adjusted cost base (ACB).

  • The adjusted cost base (ACB) can be described as the cost of an asset, for tax purposes. It is
    generally equal to the sum of the purchase price, plus expenses incurred to make the purchase,
    plus expenses incurred to sell the asset, less any capital realized.

Rollover to Dependent Children or Grandchildren

The fair market value of an RRSP is generally included in the deceased’s income for the year of death
If financial dependency applies, RRSP proceeds can roll over tax-free into:
*A trust.
*Registered disability savings plan (RDSP)
*Annuity for which the child is the sole
beneficiary.
*lifetime benefit trust (LBT).

* how individuals are taxed

Telework: using the detailed method (based on actual expenses paid) to calculate home office expenses
Working commission employment: allowable motor vehicle expenses, entertainment expenses related to earning income and work-space-in-the-home expenses.
Self-Employed: business expenses allowed