Canada’s Tax System: The Basics
Knowing the basics can help you stay on the right side of the law.
If you are a recent immigrant to Canada (or if you plan to move soon), you should take some time to understand the tax system in your new country. As with your home country, you need to ensure that you file a tax return every year, even if you have no income to report.
Understanding the basics of the Canadian tax system can help you avoid potentially costly mistakes. What’s more, filing your tax paperwork correctly and on time each year will help you to integrate into Canadian society; your tax dollars enable you to contribute to local roads, schools, and other vital services, instilling a sense of pride in your new Canadian identity.
Below is a very basic introduction to Canada’s tax system. This information is designed to introduce you to the Canadian tax system and allow you to complete your first income tax and benefit return. We encourage you to do research beyond the scope of this article.
Newcomers to Canada
For tax purposes, you are considered a newcomer to Canada if you are a recent immigrant or resident returning to the country. Your status as a newcomer will only apply for the first year.
Who is a Resident of Canada?
You officially become a Canadian resident when you first establish your residential ties to the country. This usually begins on the date you land. When you arrive to Canada, you will need a social insurance number (SIN), which you can obtain from any Service Canada centre.
Canadian residents can include refugees, individuals who have received permanent resident status from Immigration, Refugees and Citizenship Canada, and anyone who has permission to stay and work in Canada. If you have previously been a resident of Canada and you are returning, you will be considered a resident of Canada from the date that you re-establish residence.
All the income you earn from your first date in Canada, including income earned in other countries, will need to be accounted for on your annual tax return. You will not be taxed in Canada on any income you earned in part of the year that occurred before you became a Canadian resident.
Canadian Tax System
Canada uses a progressive tax system, which simply means that anyone who earns more money will pay more taxes. The Canada Revenue Agency (CRA) is responsible for calculating and collecting these taxes, which help pay for many of the positive services in society. Tax money also helps the federal and provincial governments to support vulnerable people in society, including children, seniors, and refugees.
Canadians pay different types of taxes, including provincial and federal sales tax, property taxes, and income tax.
GST and HST
GST (Government Sales Tax) is applied to most services and goods in Canada. HST (Harmonized Sales Tax) is collected on these same services and goods but is collected by the provinces. These taxes are added at the point of sale. If your income is below a certain threshold, you might receive GST rebate credits.
How is Income Tax Calculated?
Every Canadian resident, as well as businesses and charities, must declare all their income each year and pay the applicable taxes on this income. These taxes are based on income level, allowed deductions, and credits applied.
All families and individuals must complete an annual tax return, and they must follow all CRA and applicable provincial guidelines. Your employer must issue you with a statement of the income you earned for the year – this form is usually called a T4 Statement of Remuneration Paid.
Provincial/Territorial Income Tax
While you technically need to calculate and pay your provincial or territorial income tax in addition to the federal taxes you owe, these are usually combined in all forms and paperwork. You may also be entitled to additional deductions on a provincial or territorial level, so make sure you investigate this thoroughly.
- April 30 – You must file your tax return documents by April 30 and pay any balance owed to the CRA.
- June 15 – If you are self-employed, you must file your taxes by June 15. If you have a balance owing for the previous tax year, however, the April 30 deadline applies for this amount.
Reducing Your Taxes
To reduce the amount of taxes you owe at the end of the year (or potentially even receive a rebate), you should assess the deductions you may be eligible to claim.
As a newcomer, you might be eligible for the following rebates and exemptions:
- A basic personal exemption
- A spousal exemption
- Tax credits for education, including tuition and textbook costs
- Housing costs
- Charitable donations
- Certain medical expenses
While the online UFile tax program is easy to use, many Canadians, especially those who are freelancers or who own businesses, choose to hire the services of an accountant to help them complete and file their taxes. Remember that even if someone else completes your forms for you, you are still solely responsible for ensuring that the information they contain is 100% accurate. Only use a trusted and reputable accountant.
You must keep and potentially produce original copies of supporting documents, which include T4s, pay stubs, and receipts that show your allowable expenses. These receipts can include transportation costs, tuition fees, and your contributions to Registered Retirement Savings Plans (RRSPs).
Once the CRA receives your tax return it will issue an official notice of assessment. Remember to keep this (and all supporting documents) for at least seven years, as the CRA will need this information if they audit you in the future.
As a Canadian resident, you are protected under the tenets of the CRA’s Taxpayer Bill of Rights Guide. It is well worth reading this to understand your obligations, rights, and rules to follow.