Taxation in Canada: An Overview Personal Income Tax - PricewaterhouseCoopers LLP
Canada imposes income tax at graduated rates upon the taxable income of individuals. Residents of Canada must include their worldwide income, whereas non-residents include only their income from carrying on a business or from providing personal services in Canada, plus certain capital gains on the disposal of Canadian property. However, non-residents who sojourn in Canada for 183 days or more in a calendar year are deemed to be residents for the entire year and as such can, absent any tax treaty override, be taxed in Canada on their worldwide income.
The basic federal individual tax rates range from 17% to 29%. Individuals except those with lower incomes are also subject to federal surtaxes of 3% of basic federal tax payable plus an additional 5% on tax otherwise payable that exceeds $12,500.
Personal tax credits can be utilised to reduce federal taxes. Currently, these include a credit of $1,098 for the individual taxpayer and $915 for a dependent spouse. Tax credits also apply for charitable donations, medical expenses, and required contributions to the government pension plans and for employment insurance premiums.
In addition, individual taxpayers are entitled to a federal tax credit equal to 13-1/3% of taxable dividends (computed on a "gross-up" basis) received from Canadian corporations. This dividend tax credit, together with all personal tax credits, may be applied against basic federal tax, but cannot give rise to a cash refund. Residents of the province of Quebec receive a tax reduction of 16.5% of the basic federal tax payable net of the non-refundable tax credits.
In computing taxable income, individuals may deduct qualified contributions to employers' Registered Pension Plans and individual Registered Retirement Savings Plans. Other deductions include interest on money borrowed to earn income, professional and union dues, and qualified moving expenses.
An alternative minimum tax ("AMT") in lieu of regular income tax is imposed if the use of tax preference items reduces regular federal tax to less than the AMT. Federal AMT is computed as 17% of taxable income plus specific tax preference items and less a basic $40,000 AMT exemption.
Provincial income taxes are imposed in addition to the federal tax and, except in Quebec, are computed as a percentage of the basic federal tax payable (after deducting personal tax credits and the dividend tax credit). For ease of computation, all individuals are treated as being resident in the province where they reside on December 31, or the date they ceased to be a resident of Canada upon their emigration. In lieu of provincial taxes, income not earned in a province, such as foreign business income or income earned in Canada by non-residents, is subject to a surtax of 52% of basic federal tax.
The maximum combined federal and provincial marginal tax rates for individuals on ordinary income such as salary, wages and interest, currently ranges from about 44% to 54% depending on the province of residence. For capital gains, the range is 33% to 41%, as only 75% of capital gains are subject to tax. Dividends from Canadian corporations are charged with maximum combined rates in the range of 30% to 39% due to the special dividend tax credit.
The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.
While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without first consulting a PricewaterhouseCoopers LLP professional. Should you have any questions concerning the information provided herein or require specific advice, please contact your PricewaterhouseCoopers LLP advisor, or:
David W. Steele
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Toronto, Ontario M5H 1V8
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