An Overview of Taxation in Canada: Personal Taxable Income - PricewaterhouseCoopers LLP
Individuals who are resident of Canada are subject to Canadian income tax on their worldwide income. Non-residents of Canada include only their income from carrying on a business or from providing personal services in Canada, plus three-quarters of certain capital gains on the disposal of Canadian property. Canadian investment income earned by non-residents is generally only subject to withholding tax that is often reduced or eliminated pursuant to the terms of various tax treaties.
In the calendar year during which an individual immigrates to or emigrates from Canada, he will be taxed as a "part-year resident". For that part during which he was a resident of Canada, he is subject to tax on his worldwide income and taxed only on his Canadian-source income for the remainder of the year while a non-resident.
The taxable income of an individual resident in Canada falls into a few main categories:
- income from an office or employment ("employment income");
- income from a business (computed much the same as corporate taxable income);
- income from property (generally interest, dividend, rent and royalty income);
- capital gains; and
- other income (such as that from pensions, scholarships and research grants, less other allowable deductions like moving expenses and contributions to prescribed pension and retirement savings plans).
Dividends received from Canadian corporations by individuals resident in Canada are subject to a gross-up and tax credit mechanism, the effect of which is to reduce the taxation on dividends and thus minimise the impact of double taxation on the distribution of corporate earnings. The result of this mechanism is that Canadian dividends will generally be subject to a maximum combined federal and provincial tax rate in the range of 30% to 39%.
Dividends received from non-resident corporations do not receive this gross-up and credit treatment. Hence, they are taxed at a higher maximum marginal rate (44% to 54% depending on the province of residence) prior to the application of any foreign tax credit.
Dividends paid on a timely basis out of the non-taxable portion of the capital gains of a Canadian-controlled private corporation can be received tax-free by Canadian resident shareholders.
Gains (losses) realised on the disposition of capital property (generally, property that is not inventory) are regarded as capital gains (losses). Only three-quarters of such gains are included in Canadian taxable income. A capital gain is computed as the excess of proceeds over cost less expenses related to the disposition. Cost is the actual cost paid or, in certain circumstances, the fair market value of property at December 31, 1971 (the date capital gains became taxable in Canada) or the fair market value on the date the individual became a resident of Canada if the property was owned on that date. Capital losses are reduced to three-quarters of the loss otherwise calculated and can only be used to offset capital gains. Capital losses can be ordinarily carried forward indefinitely and carried back for three taxation years.
No statutory distinction is made between a short-term and a long-term capital gain. If a gain is a capital gain, only 75% is included in taxable income subject to tax at the ordinary federal and provincial tax rates.
Up to $500,000 of capital gains from qualifying small business shares or farm property can be exempt from tax.
Employment income includes various kinds of direct payments (both regular salary or wages and special allowances or bonuses) and taxable benefits (often called "fringe benefits") received or enjoyed by employees. Both amounts received from employers and from others by reason of the individual's employment will generally be caught in the tax net. Taxable benefits include:
- value of employer-provided rent-free or low-rent housing;
- imputed interest on interest-free or low-interest loans;
- personal use of employer's automobile (prescribed taxable benefits must be computed);
- value of free board or lodging (except at special work sites);
- holiday trips, prizes and incentive awards related to job performance;
- stock options; and
- gifts, whether in cash or in kind.
A non-resident employed in Canada during the year or during a previous year is subject to Canadian income taxes on income from the duties of an office or employment performed by him in Canada. A non-resident who receives remuneration for employment from a Canadian resident, and who was resident in Canada in any previous tax year, may be subject to Canadian income taxes on that remuneration unless it is attributable to duties performed outside Canada and is subject to foreign income tax, or was paid for selling property, negotiating contracts, or rendering services for his employer in the ordinary course of the employer's business.
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 PricewaterhouseCoopers LLP 145 King Street West Toronto, Ontario M5H 1V8 Canada
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