How does taxation work in canada

Any partial repayments made during the year are netted from the loan balance in calculating the deemed interest benefit. The imputed interest that is included in income as a taxable benefit is deemed to be interest paid by the individual. The employee is considered to have received a loan or incurred a debt when the funds are advanced, or the relevant documents are produced and they become legally obligated to repay the loan or discharge the debt.

The CRA prescribed rate applicable on the date the loan is advanced is used for calculating the taxable income during the first 5 years the loan is outstanding and is replaced by the prescribed rate in effect on the first day of each succeeding 5-year period the loan remains outstanding.

Reasonable automobile allowances calculated on a per kilometer basis that are paid to employees who use their personally owned motor vehicles for business purposes are not considered a taxable benefit to those employees if the allowances do not exceed the rates set for each year by CRA For , the rates are CAD59 cents per kilometer for the first 5, kilometers driven and CAD53 cents per kilometer driven after that.

If the employer provides an automobile for the individual, rather than paying a cash allowance or reimbursement, the value of the taxable benefit received by the employee is calculated each year using a predetermined formula and may differ depending on whether the automobile is purchased with the original cost to the employer always being used to calculate the benefit or leased with the actual monthly lease payments for the relevant year being used by the company.

The stand-by charge may be reduced if the employee uses the automobile more than 50 percent for business and drives less than 20, kilometers per year for personal use.

The operating cost benefit may also be reduced if the individual uses the automobile more than 50 percent of the time for business use. Contemporary documentation, such as logbooks, is usually required by the CRA to support the eligibility of an employee for a reduced automobile benefit.

The following paragraphs describe the provisions in the Income Tax Act that may apply to expatriates working on temporary assignment within Canada:. An individual is deemed by the Income Tax Act to have disposed of all of their assets other than Taxable Canadian Property and to have reacquired the same assets at their fair market value immediately before becoming residents of Canada.

However, any appreciated losses for assets acquired before establishing Canadian residency due to a decrease in their fair market values from their original costs will be lost due to the application of this rule. See also section titled Tax-Exempt Income section with respect to the special work site provision. Canada allows individuals who are temporarily working in Canada to continue to participate in qualifying foreign employer-sponsored pension plans or foreign Social Security Arrangements.

Stock option income is taxable in Canada if the individual is a resident when the options are exercised. Stock option income may also be taxable in Canada if the options were granted while the individual was a resident of or working in Canada even if exercised after departure from Canada.

A foreign tax credit may be available if the stock option income was subject to tax in another jurisdiction. A deduction equal to 50 percent of the taxable stock option benefit may be available if all of the following criteria is met. Employers must track options they or a related corporation e. Employers may also designate new options as non-qualifying deduction to ease the tracking requirements and provide for a corporate tax deduction.

However, both the employees receiving the option grants and the CRA must be notified in writing that this designation is being made within 30 days of the grant date.

The salary of a Canadian resident is taxable in Canada regardless of where the services are performed or where the salary is received by or paid to the employee or where the employer paying the compensation is resident.

The allocation of income to foreign business trips is beneficial only as far as it can be used to alleviate double taxation through the foreign tax credit mechanism.

Dividends and interest income are generally taxable in Canada in the calendar year in which the income is received. In addition, for loan investments that do not pay interest on an annual basis, an annual interest accrual may need to be determined and included in taxable income.

Dividends from taxable Canadian corporations are taxed at a reduced rate through a gross-up and tax credit mechanism, which in principle takes into account income taxes paid at the corporate level. In the case of income from foreign investments, taxes withheld in the source jurisdiction are creditable against Canadian taxes otherwise payable, based on the lower of 15 percent and the applicable tax treaty rates, and calculated on a country-by-country basis.

Taxes paid to one foreign jurisdiction may no t be claimed to reduce Canadian income tax applicable to investment income received from another foreign jurisdiction. Upon the disposition of capital property, the gain or loss is calculated as the difference between the cost base of the asset and the proceeds of sale less any selling expenses. Only one-half of the net capital gain is added to taxable income, while a net capital loss may be carried back to reduce capital gains realized in any of the 3 prior years, and thereby recover the relevant tax, or be carried forward and applied to reduce net taxable capital gains realized in any future tax year.

Donations of certain appreciated capital property to registered charities may result in no capital gains being subject to tax and a donation credit being available to the donor. Accrued capital gains can also create an income tax liability at death. Capital gains are generally measured from the original cost of the particular property. However, on immigration to Canada, most property owned by the individual is deemed to be reacquired at its fair market value as of the date of immigration.

This usually ensures that Canada only taxes the capital gains that accrue while the individual is resident in Canada. When non-Canadian property is sold or deemed to have been sold, generally the gain for Canadian tax purposes must be calculated by converting the net proceeds into Canadian Dollars on the closing date or the deemed closing date and by converting the cost into Canadian Dollars using the exchange rate as of the date the property was purchased or was deemed to have been purchased.

As a result, a foreign exchange gain or loss may arise on the sale or the deemed sale that is independent of the actual gain or loss on the property. Capital gains arising on the disposition of a principal residence are generally not subject to tax with respect to the years it was owned and lived in by an individual, or by a spouse or child of that individual, while the individual was a resident of Canada.

A family husband and wife or common law spouses is limited to designating only one home as a principal residence per tax year. A loss realized on the sale of a principal residence is not deductible.

Capital losses can be used to reduce capital gains incurred during the year to a balance of zero. A net capital loss occurs when capital losses exceed capital gains during the year. Generally, net capital losses can be applied against taxable capital gains of the 3 preceding years and to taxable capital gains of all future years.

This term is defined in the Income Tax Act and includes:. The sale of inventory and the recapture of past tax depreciation on depreciable assets e. When a taxpayer disposes of personal-use property that has an adjusted cost base or proceeds of disposition of more than CAD1,, capital gains or losses may be recognized. Capital gains must be reported from such dispositions. There is no gift tax in Canada.

However, income tax may arise on the gifting of capital property that has appreciated in value since it was acquired by the donor because the donor will be deemed, under Canadian tax rules, to have disposed of the capital property for proceeds equal to its fair market value on the date the gift is made.

There are certain exceptions for gifts made to a spouse. Also, rules pertaining to income splitting must be considered. In certain circumstances, if the item gifted is an income-producing asset or is used to purchase an income-producing asset, the income may be attributed back to the taxpayer. Rules for non-resident trust expand the taxation of income earned by these trusts.

If an offshore trust has a Canadian resident contributor, or a Canadian beneficiary and a contributor with nexus to Canada, the trust will be deemed to be a resident of Canada and will be subject to tax in Canada on its worldwide income and capital gains.

At the same time, all Canadian-resident contributors and beneficiaries will be liable jointly for the tax liability of the trust. Capital gains were not taxed prior to 1 January Therefore, to eliminate any capital gains that accrued before , transitional rules apply when a taxpayer disposes of a capital property acquired before The transitional rules allow the taxpayer to reduce the proceeds of disposition when a taxpayer calculates the capital gain on the disposition of a property.

Where a taxpayer ceases to be resident in Canada at any particular time, the taxpayer is deemed by the Income Tax Act to have disposed of certain capital properties owned immediately before departure for proceeds equal to their fair market value on the departure date. The taxpayer is also deemed to have reacquired the property immediately after ceasing to be resident in Canada at a cost of the same amount.

Ownership is to be interpreted in the broadest sense, in accordance with Canadian judicial interpretation, no matter where the property is located. Certain assets are exempt from this deemed disposition rule, such as interests in Canadian and most foreign pension plans, unvested restricted share units, unexercised stock options and Taxable Canadian Property. In addition, if the taxpayer was a resident of Canada no longer than 60 months during the month period ending on their departure date, any assets owned when the taxpayer first became a resident and still owned at the time of departure will be exempt, as well as any assets inherited during the period if still owned by the taxpayer on the departure date.

A taxpayer who becomes a resident of Canada is deemed to have acquired at the time of becoming a resident each property owned at a cost equal to fair market immediately before that time. A capital gains exemption of up to CAD, CAD1,, for the second and third categories listed below may be claimed against capital gains arising from the disposition, on or after 1 January of the following types of properties:.

A taxpayer must be a resident of Canada for tax purposes throughout the entire taxation year to be eligible to claim the capital gains exemption. Taxpayers who were only residents for part of the taxation year in question will also be considered to be qualifying residents if they were considered residents of Canada throughout the year preceding or subsequent to the year in question.

Deductions permitted depend on amounts actually expended and substantiation of the expenditure is generally required. The limit is reduced by certain pension adjustments to reflect employer and individual funding of other registered pension plans. This poses a problem for new residents of Canada earning substantial Canadian-sourced income in the year of arrival, as they are unable to contribute to an RRSP in the first year in order to reduce their taxable income. However, contributions can be made following departure from Canada for deductibility in the final reporting year or in a succeeding year.

This is beneficial if there is substantial income to report in the year of departure or if there will be trailing Canadian source employment income e. The deduction limit may be higher if the individual has unused contribution room carried forward from previous years. What are the tax reimbursement methods generally used by employers in Canada?

A gross-up is not required in the year of departure but may be advisable in order to avoid having to file an income tax return in the year after departure. If an individual is taxable in respect of employment income, the payer has a withholding requirement. These tables are updated if there are any changes in the withholding rates during the relevant year. For example, monthly, annually, both, and so on.

For the first year an individual is required to pay only two instalments and those must be received by the relevant Canadian tax authority no later than 15 September and 15 December.

Late remittance penalties will be applied on any instalments received after the relevant due date. The CRA will generally send taxpayers instalment reminder notices indicating the instalments due under method three, following the first tax year the taxpayers have a balance due on the filing of their tax returns that is in excess of CAD3, Is there any Relief for Foreign Taxes in Canada? For example, a foreign tax credit FTC system, double taxation treaties, and so on? The allowable foreign tax credit cannot exceed the Canadian tax that would otherwise be payable on that category of income.

Foreign tax credits on property income other than real property cannot exceed the lesser of 15 percent or the withholding rate provided in a relevant tax treaty e.

The Canada-US tax treaty provides relief against US tax for the non-creditable foreign tax on property income, as well as allows US taxes in excess of the withholding rate specified in the treaty to be deducted by US citizens on their Canadian tax returns. Any unused foreign tax credits incurred in respect of foreign business income may be carried back 3 years and forward 10 years.

Unused non-business taxes expire if they cannot be fully claimed as foreign tax credits for the relevant tax year. What are the general tax credits that may be claimed in Canada? Please list below.

Non-refundable tax credits that may be claimed on a Canadian income tax return by a resident include but are not limited to :. The applicable credits are generally calculated by applying the basic federal and relevant provincial or territorial rates to the eligible amounts identified above. Many of these amounts must be pro-rated for the year of arrival and for the departure year by the percentage obtained by dividing the total number of days the individual was a resident of Canada by the total number of days in the relevant calendar year.

Non-residents may only claim general tax credits for the following items, if relevant, unless 90 percent or more of their net income for the relevant calendar year is subject to Canadian income tax:. This calculation assumes a married taxpayer resident in Ontario, Canada with two minor children whose 3-year assignment begins 1 January and ends 31 December In this case, Article 15 relief would be denied, and the employee would be subject to tax in the host country.

For the purposes of this publication, a short-term assignment is defined as an assignment that lasts for less than 1 year. However, if the individuals are primarily residents of another jurisdiction that has a tax treaty with Canada and, under the residency tie-breaker rules in that treaty, the individuals are primarily resident in that other jurisdiction, they will be deemed, under a specific rule in the Income Tax Act , to be a nonresident of Canada for tax purposes regardless of the sojourning rule described above or the other Canadian domestic residency rules.

Employers, whether they are residents or nonresidents of Canada, are required to withhold and remit Canadian taxes with respect to all amounts characterized as employment income earned in Canada, even if those amounts are exempt from Canadian income tax under the provisions of an applicable income tax convention, unless a formal waiver letter has been obtained from the CRA. Employers who fail to obtain waivers or to withhold taxes from Canadian source compensation are liable to pay those taxes themselves in addition to penalties which range from 10 percent to 20 percent and arrears interest that may be assessed on those taxes.

If the individual is considered to be a non-resident of Canada for taxation purposes, then only employment and self-employment income earned from performing services within Canada, gains realized from the sale of Canadian Taxable Property and any investment income, except for most types of interest, received from Canadian sources will be subject to Canadian taxes. An employee who works at a special work site may have certain benefits that can be excluded from their income.

These benefits include:. The term "temporary" refers to the duration of duties performed by the individual employee rather than the project as a whole. The length an assignment may last and still qualify for the special work site exclusion is not defined in the Income Tax Act.

Subsequent extensions of the assignment may still qualify for the special work site exemptions, but this issue should be reviewed each year to assess whether to continue claiming the exemption. Are there any additional considerations that should be considered before initiating a short- term assignment in Canada? If so, what are the rates for employers and employees? Canada has an extensive social security system that confers benefits for disability, death, family allowances, medical care, old age, sickness, and unemployment.

These programs are mainly funded through wage and salary deductions and employer contributions. The credits are calculated at the lowest federal and provincial tax rates. There is no age limit for deducting EI premiums. CPP and EI premiums are assessed based on employment and for CPP only self- employment earnings and the rates are adjusted each year based on actuarial calculations prepared by the federal government.

However, income tax may arise since the assets gifted are treated as being disposed of at fair market value. There are certain exceptions for gifts to a spouse. Rules pertaining to income splitting must also be considered. In certain circumstances, if the item gifted is an income-producing asset or is used to purchase an income-producing asset, the income is attributed back to the taxpayer. No federal or provincial estate tax or inheritance tax is imposed in Canada.

However, to the extent that a Canadian resident has accrued capital gains or losses, these will be realized on death. For income tax purposes, an individual is considered to have disposed of capital property at its fair market value on the date of death.

Taxable capital gains may result, but provisions exist to enable a surviving spouse or other specified beneficiaries to inherit the original cost base and thereby defer recognition of the gain. Appropriate planning is required to obtain this result. The most common types of TCP affected by the deemed disposition on death are Canadian real estate and shares in a private corporation owning real estate in Canada.

The probate fee is generally applied to the fair market value of the assets flowing through the will. Planning opportunities exist to help minimize the tax through joint ownership, trusts, designation of beneficiaries, and other means. The sale or other transfer of real estate including the transfer of shares in real estate companies is subject to a real estate transfer tax imposed by the province or territory where the real estate is located.

Rates vary among provinces. Municipalities also levy annual property taxes on residential, commercial, and industrial real estate. Canada levies a federal goods and services tax GST which is a value-added tax that applies to most goods and services in Canada.

The GST rate is 5 percent. Canada is also proposing a new luxury tax of 10 to 20 percent that will apply to certain new personal aircrafts, boats, and luxury vehicles effective January 1, Three provinces British Columbia, Saskatchewan, and Manitoba have a provincial sales tax PST that generally applies to the sale of goods, and in some cases, intangibles, services, and insurance contacts. The PST is not a value added tax and is not recoverable.

The general PST rates range from 6 percent to 7 percent up to 20 percent on certain goods. British Columbia has introduced new registration and collection rules for many businesses outside the province Canadian and foreign businesses effective April 1, Saskatchewan has registration and collection obligations for various businesses outside the province Canadian and foreign businesses as well as marketplace facilitators and sellers.

Manitoba is proposing new PST registration and collection obligations for marketplaces effective December 1, Are there additional taxes in Canada that may be relevant to the general assignee? For example, customs tax, excise tax, stamp tax, and so on. The rates vary among municipalities. Although these are not actual income taxes, the province of Ontario and the Northwest Territories and the Territory of Nunavut levy provincial health premiums on the income of individuals who are subject to income tax in those jurisdictions.

The Ontario health premiums are calculated and added to the provincial income taxes calculated on the tax returns of individuals who are residents, or part-year residents, of that province. The following provinces and territories impose a tax on employers based on the total annual salaries earned by their employees who report to work, or are deemed to report for work, at an office or other permanent location of the employer located within the relevant jurisdiction:.

The EHT is remitted to the relevant provincial or territorial authority responsible for administering this tax. Canadian residents are required to file the following information returns, in addition to their personal income tax returns, if they:. The deadline for filing these annual information returns is generally the same as for the individual's Canadian tax return. Failure to file any of these information returns on a timely basis may result in the assessment of penalties.

A taxpayer is exempt from having to file a T, T, T or a T in the first year of becoming a resident of Canada provided the taxpayer was never a Canadian resident in any prior year.

This summary provides basic information regarding business visits to, and work authorization for, Canada. This information is of a general nature and should not be relied upon as legal advice. All foreign nationals who intend to engage in productive employment in Canada will need a Work Permit. All foreign nationals who intend to engage in international business activities without directly entering the Canadian labor market may enter Canada as business visitors.

For work permit and business visitor applications, foreign nationals must coordinate with their employer to collect and legalize corporate and personal documentation. Canada distinguishes between visa-requiring nationals and visa-exempt nationals for entry purposes. A TRV is an entry document, separate from a status document such as a work permit. A visa-requiring national — even if they have a valid status document — will not be granted entry to Canada unless they have a valid TRV.

The eTA application is made online and the approval is linked to a specific passport. Normally, the eTA is approved immediately, unless there are potential inadmissibility issues that require additional review. In most cases foreign nationals are also required to give biometrics if entering Canada to work, study or visit. Biometrics are required by visa-exempt and visa requiring nationals between the ages of 14 and For visa-exempt nationals, biometrics may be done at the port of entry.

For visa-requiring nationals, biometrics must be completed abroad. Biometrics are valid for a period of up to 10 years. In order to enter Canada, foreign nationals must not have criminal or medical inadmissibility issues. Describe a which nationalities may enter Canada as non-visa national , b which activities they may perform and c the maximum length of stay. A business visitor is a foreign national who comes to Canada for international business activities without directly entering the Canadian labor market.

These activities may include attending internal meetings, attending conferences, developing new business, etc. In order to qualify as a business visitor, the traveler must maintain their position with the foreign employer and should not be paid by the Canadian parent or subsidiary for more than expenses.

Under this category, travelers may stay for 6 months from the date of entry, or until the passport expiry — whichever comes first. Visa-exempt nationals may seek entry directly at the port of entry with proper supporting documentation.

Other than American citizens, visa-exempt nationals must obtain an Electronic Travel Authorization eTA in order to enter Canada by commercial airlines. Describe a the regulatory framework for business traveler being visa nationals especially the applicable visa type , b which activities they may perform under this visa type and the c maximum length of stay. A TRV may be issued for up to 10 years and allows multiple entries; however, upon each entry, a foreign national is allowed to stay in Canada for up to 6 months, unless otherwise noted by the Immigration Officer.

Outline the process for obtaining the visa type s named above and describe a the required documents including any legalization or translation requirements , b process steps, c processing time and d location of application. Are there any visa waiver programs or specific visa categories for technical support staff on short-term assignments? Specifically, the technical support staff must be in high-skilled professional occupations.

The work duration must be less than 15 or 30 consecutive calendar days. She has a small portfolio of interest-bearing investments started for her by her father which she has transferred to Canada. Here is how she filled out her income tax return. She will apply a tax rate of 5. Evelyn's income taxes are fairly straightforward but, as you can see, preparing your income tax return is a multi-step process.

If your return is complicated, don't be afraid to seek out someone who prepares tax returns professionally. Ask your Advisor; he or she will have some tax expertise and will probably be able to recommend a tax preparer. The Tax System in Canada. Goods and Services Tax GST and the Harmonized Sales Tax HST Consumption tax, more commonly known as a sales tax, is a tax on your purchases — whether you are shopping for new clothes, dining in a restaurant or buying a mutual fund.

Income Taxes Who is required to pay income taxes in Canada? Paying income taxes in Canada Canada's tax system is unique in many respects and will probably be different from what you are used to in your country of origin. Page 2 — Total Income This is where you report all your sources of income for the past year, including: Employment income. If you were employed in the past year, you will have received a T4 slip from your employer showing the amount of money you made while working there.

If you had more than one employer last year, you will receive a T4 from each employer. Your T4 will also detail the taxes your employer paid on your behalf or any deductions made from your paycheque more below.

Self-employment income. If you were self-employed in the past year, you will report the amount of income you earned from your business, supported by documentation such as a profit and loss statement. Pension income. If you are retired, pension income can come from a few sources.

If you have a workplace pension, accumulated over your work career, you report that here as well. In this case, the pension administrator will send you the appropriate slip. Investment income. This is income earned on your investments and includes dividends from common or preferred shares, interest from bonds or bank accounts, and capital gains or losses on investments sold see the Investing brochure.

The financial institution at which your investments are held will provide you with the necessary tax slips and you will complete a separate form providing the details that you will submit with your return. Calculation of federal tax Canada's progressive or graduated tax rate structure is meant to ease the tax burden on those who have lower incomes. Schedule 1, Step 1: Federal non-refundable tax credits There are many credits available and every taxpayer will be eligible for at least some of the credits listed on Step 1 of Schedule 1 of your tax return.

The common credits include: Basic personal amount. If you were employed in the past year, your employer will have deducted contributions to CPP and EI from your paycheques. Those amounts will appear on your T4 slip and you can credit them against your taxable income.

If you are self-employed and making contributions, you will fill in those amounts on your tax return. Canada employment amount. If you were employed in the past year, you can claim the Canada employment amount, a non-refundable tax credit meant to offset work-related expenses such as home computers, uniforms and supplies.

If you were self-employed, you cannot claim the credit. Medical expenses amount. Although most medical expenses are covered through your provincial or territorial health programs, certain other expenses you might incur are not. Eligible expenses, such as dentist and chiropractic services, can be included for a credit. Charitable donations. If you made contributions to an eligible charity you can credit the amount of your donation.

Schedule 1, Step 2: Tax on federal income You will enter your taxable income from Page 3 of your T1 general return form on this table and calculate your tax payable. Schedule 1, Step 3: Net federal tax Once the tax payable has been calculated in Step 2, it will be reduced by the eligible tax credit amounts calculated at Step 1 of Schedule 1. Page 4 — Refund or balance owing On the first line, you will enter the amount of federal taxes calculated.

Calculation of provincial or territorial taxes Step 6. By submitting your email address, you acknowledge that you have read the Privacy Statement and that you consent to our processing data in accordance with the Privacy Statement. Individuals resident in Canada are subject to Canadian income tax on worldwide income. Relief from double taxation is provided through Canada's international tax treaties, as well as via foreign tax credits and deductions for foreign taxes paid on income derived from non-Canadian sources.

Non-resident individuals are subject to Canadian income tax on income from employment in Canada, income from carrying on a business in Canada and capital gains from the disposition of taxable Canadian property.

Individuals resident in Canada for only part of a year are taxable in Canada on worldwide income only for the period during which they were resident. Personal tax credits, miscellaneous tax credits, and the dividend tax credit are subtracted from tax to determine the federal tax liability. In addition to federal income tax, an individual who resides in, or has earned income in, any province or territory is subject to provincial or territorial income tax.

Except in Quebec, provincial and territorial taxes are calculated on the federal return and collected by the federal government. Rates vary among the jurisdictions. Two provinces also impose surtaxes that may increase the provincial income taxes payable. Provincial and territorial taxes are not deductible when computing federal, provincial, or territorial taxable income. All provinces and territories compute income tax using 'tax-on-income' systems i.

All except Quebec use the federal definition of taxable income.