Personal income of individuals in Canada is calculated by adding provincial / territorial tax to federal income tax. In some Canadian provinces / territories, an additional surtax or surtaxes are also added to the provincial / territorial taxes (i.e. Nova Scotia, Ontario) to calculate the final tax. Please see 'Marginal Tax Rates' below.
In 2010, Canada federal income tax rates vary progressively between 15% - 29%, however, adding the provincial taxes, combined Canada tax rates for individuals may go up to 50% (i.e. in Nova Scotia) for taxable income exceeding CAN 150,000. Provincial tax rates also are progressive, with the maximum rate in the range of 10% (Alberta) - 24% (Quebec).
15% on the first $40,970 of taxable income, +
22% on the next $40,971 of taxable income (on the portion of taxable income between $40,970 and $81,941), +
26% on the next $45,080 of taxable income (on the portion of taxable income between $81,941 and $127,021), +
29% of taxable income over $127,021.
Canada Provincial/Territorial tax rates for 2010: Under the current tax on income method, tax for all provinces (except Quebec) and territories is calculated the same way as federal tax.
Provinces / Territories Tax Rate(s)
Newfoundland and Labrador 7.7% on the first $31,278 of taxable income, +
12.65% on the next $31,278, +
14.40% on the amount over $62,556
Prince Edward Island 9.8% on the first $31,984 of taxable income, +
13.8% on the next $31,985, +
16.7% on the amount over $63,969
Nova Scotia 8.79% on the first $29,590 of taxable income, +
14.95% on the next $29,590, +
16.67% on the next $33,820 +
17.5% between $93,000 and $150,000
21% over $150,000
New Brunswick 9.3% on the first $36,421 of taxable income, +
12.5% on the next $36,422, +
13.3% on the next $45,584, +
14.3% on the amount over $118,427
Quebec first $38,570 16.00%
over $38,570 up to $77,140 20.00%
over $77,140 24.00%
Ontario 5.05% on the first $37,106 of taxable income, +
9.15% on the next $37,108, +
11.16% on the amount over $74,214
Manitoba 10.8% on the first $31,000 of taxable income, +
12.75% on the next $36,000, +
17.4% on the amount over $67,000
Saskatchewan 11% on the first $40,354 of taxable income, +
13% on the next $74,943, +
15% on the amount over $115,297
Alberta 10% of taxable income
British Columbia 5.06% on the first $35,859 of taxable income, +
7.7% on the next $35,860, +
10.5% on the next $10,623, +
12.29% on the next $17,645, +
14.7% on the amount over $99,987
Yukon 7.04% on the first $40,970 of taxable income, +
9.68% on the next $40,971, +
11.44% on the next $45,080, +
12.76% on the amount over $127,021
Northwest Territories 5.9% on the first $37,106 of taxable income, +
8.6% on the next $37,108, +
12.2% on the next $46,442, +
14.05% on the amount over $120,656
Nunavut 4% on the first $39,065 of taxable income, +
7% on the next $39,065, +
9% on the next $48,891, +
11.5% on the amount over $127,021
Alberta (AB) 39.00%
British Columbia (BC) 43.70%
Manitoba (MB) 46.40%
New Brunswick (NB) 43.30%
Newfoundland & Labrador (NL) 43.40%
Nova Scotia (NS) 50.00%
Prince Edward Island (PE) 47.37%
Ontario (ON) 46.41%
Québec (QC) 48.22%
Saskatchewan (SK) 44.00%
Northwest Territories (NT) 43.05%
Nunavut (NU) 40.50%
Yukon (YT) 42.40%
Individuals resident in Canada for tax purposes are subject to tax on their worldwide income. Non-residents are subject to tax in Canada on Canadian-sourced employment income and business income; 50% of the capital gains from the disposition of certain specified Canadian assets; and 100% of gains on dispositions of certain property such as resource property or certain life insurance policies. Residency is determined based on a number of factors including the number of days present in Canada in a year (183 days or more) as well as common law tests of residency relating to the jurisdiction where one has the closest personal ties. Canada's tax treaties may contain further provisions regarding determination of residency.
Tax returns are filed based on the calendar year and generally are due by 30 April of the following year. Business proprietors and partners of most partnerships, and their spouses, are required to file their returns by 15 June of the following year. There is no provision for joint spousal tax returns. Certain pension benefits may be allocated between two spouses by election.
Virtually all income earned is subject to taxation. Employment and some forms of investment income are included in taxable income on a cash basis. Business income and some investment income, notably interest, are included in income on an accrual basis. Income earned from farming, fishing and certain professions is subject to a cash or modified cash method of accounting. Taxable Canadian dividends received by an individual resident in Canada are subject to a gross-up and dividend tax credit mechanism.
Employees are subject to withholding on their earnings from employment in respect of income tax and contributions for Canada Pension Plan and Employment Insurance.
Self-employed individuals and those with income from other non-employment sources are required to make quarterly instalments of estimated taxes due for the year. The balance of taxes and Canada Pension Plan owing for a calendar year is due by 30 April of the following year.
Various deductions are permitted to individuals including, but not limited to, contributions to Registered Pension Plans and Registered Retirement Savings Plans; interest paid on funds borrowed to earn income; and qualifying alimony or spousal support payments. Child maintenance payments are neither deductible by the payor nor taxable to the recipient if paid pursuant to an agreement entered into after 30 April 1997 or if an agreement or Court Order made before that date is modified after 30 April 1997. In addition, tax credits are offered for personal exemptions, donations, medical and education expenses, Canada Pension Plan and Employment Insurance contributions.
Personal income tax rates are progressive with the maximum federal rate being reached at approximately $120,000 of taxable income. The thresholds for the maximum provincial rate vary between the provinces but are below the federal threshold.
Basis – Canadian residents are taxed at the federal and provincial levels on their worldwide income. Certain income of controlled foreign affiliates is taxed on an accrual basis. Taxation can also arise in respect of investments in foreign investment entities and certain nonresident trusts.
Nonresidents are taxed on Canadian-source income and on gains from the disposition of taxable Canadian property.
Residence – An individual is resident in Canada if he/she resides in Canada or is ordinarily resident in Canada. A nonresident individual will be deemed to have been resident in Canada if he/she spends at least 183 days in Canada in a calendar year.
Except for Quebec, both residency statuses may be overridden by a tax treaty.
Filing status – There are no family income tax returns in Canada. Family members must each compute their income tax liability separately. However, attribution rules may require an individual to report income earned by a family member from property transferred by the former to the latter.
Taxable income – Employment income (including most employment benefits), certain investment income and profits earned from a business or profession are taxable at the individual's applicable personal tax rate.
Dividends received from a Canadian corporation are subject to a more favourable tax regime.
Capital gains – Fifty percent of capital gains realised are includible in an individual's income.
Deductions and allowances – Subject to certain restrictions, deductions or nonrefundable tax credits are granted for various outlays including: payments to registered retirement savings and pension plans, certain moving expenses, union and professional dues, child care expenses, medical expenses, charitable and political donations and investment carrying charges. Tax credits may be available for spouses, age and certain dependents.
Tax Rates – Federal tax rates are progressive up to 29%. Provincial tax rates also are progressive, with the maximum rate in the range of 10% (Alberta) - 24% (Quebec).
Inheritance/estate tax – There is no formal inheritance tax in Canada. However, a person who gives property as a gift is deemed to dispose of the property for proceeds equal to its fair market value. There is no formal estate tax, but a deceased taxpayer is deemed to have disposed of all property owned immediately before the time of death at fair market value.
Net wealth/net worth tax – No
Social security – Employed persons and their employers are required to make employment insurance and government pension plan contributions, with the amount based on the employee's earnings.
About Quebec - Quebec administers its own personal income tax system, and therefore is free to determine its own definition of taxable income. To maintain simplicity for taxpayers, however, Quebec parallels many aspects of and uses many definitions found in the federal tax system.
Canada tax rates for corporations in 2010 is 18% plus Provincial / Territorial taxes, making the effective tax rate a maximum of 34% (In Nova Scotia and Prince Edward Island).
Canada Federal Corporate Tax Rates will be 16.5% effective January 1, 2011 and 15% effective January 1, 2012.
Canada 2010 Corporate Income Tax Rates
General Small Business Business Limit
Federal 18% 11% $500,000
Alberta 10% 3% $500,000
BC 10.5% 2.5% $500,000
Manitoba 12% 1% / 0% $400,000
New Brunswick 12% / 11% 5% $500,000
Newfoundland & Labrador 14% 5% / 4% $500,000
Nova Scotia 16% 5% $400,000
Northwest Territories 11.5% 4% $500,000
Nunavut 12% 4% $500,000
Ontario 14% / 12% 5.5% / 4.5% $500,000
Prince Edward Island 16% 2.1% / 1% $500,000
Québec 11.9% 8% $500,000
Saskatchewan 12% 4.5% $500,000
Yukon 15% 4% $400,000
FEDERAL TAXES AND LEVIES
Corporations resident in Canada pay income taxes on their worldwide income. Non-resident corporations are subject to income tax on Canadian-source business income, 50% of the capital gains from the disposition of certain specified Canadian assets, and 100% of gains on dispositions of certain other property such as Canadian resource property. Non-resident corporations are also subject to a 25% withholding tax on the distribution of branch profits and certain types of Canadian source income that would generally be regarded as passive income.
A treaty may restrict Canada's ability to tax non-resident corporations or reduce the withholding tax rate. The federal government and eight provinces have entered into tax collection agreements whereby the federal government administers federal and provincial taxes on corporate income. The federal government also administers the tax system for the three territories. Currently, the provinces of Alberta and Quebec administer their own corporate tax system. Ontario's corporate income tax has been administered by the federal government starting with taxation years ending after 31 December 2008.
Corporations earning income through permanent establishments in more than one province must allocate taxable income earned to the particular provinces using a specified formula. The factors for the allocation of taxable income between provinces are gross revenues, and salaries and wages attributable to a permanent establishment therein.
Combined federal and provincial or territorial corporate tax rates vary depending upon the province or territory where a corporation conducts business and the nature of its operations. Manufacturing companies are taxed at combined federal and provincial rates ranging from 21% to 34%. Other corporations are subject to combined tax rates ranging from 28% to 34%. Depending on the province where the income is taxed, a Canadian-controlled private corporation (CCPC) is entitled to lower tax rates ranging from 12% to 19% on the first $400,000 to $500,000 of active business income.
Corporate income taxes are payable in monthly instalments, with balances owing due two months after the corporation's taxation year-end or, in the case of an eligible CCPC, three months after the year-end. Returns must be filed no later than six months after the year-end. Even if there is no tax liability, a non-resident corporation is required to file a return and is subject to a penalty if the filing deadline is not met.
BRANCH PROFITS TAX
The federal government imposes a 25% branch tax on non-resident corporations carrying on business in Canada. The tax is payable on notional distributions of branch profits to the foreign head office. The rate of tax is subject to reduction by treaty.
FRINGE BENEFITS TAX (FBT)
Nunavut, the Northwest Territories, and the provinces of Newfoundland, Quebec, Ontario and Manitoba levy a tax on payroll costs to support provincial health care and other programs. Rates and exemptions vary from province to province. The federal government does not impose FBT on employers but requires employer contributions to Employment Insurance and the Canada Pension Plan based on payroll costs.
Provincial, territorial and municipal governments impose various taxes that need to be confirmed in each particular situation. These taxes include real property taxes, real property transfer taxes, business licenses, and a number of industry-specific taxes such as mining and oil & gas resource taxes, logging tax and hotel tax.
The federal government also imposes certain industry-specific taxes in addition to customs and excise duties. The federal large corporations tax, which was a minimum tax based on capital, was repealed effective 1 January 2006. Four provinces impose general capital tax on corporations with taxable capital in excess of specified minimums. All four provinces have proposed/legislated the elimination of capital tax effective between 1 July 2010 to 2012. British Columbia has a capital tax that only applies to financial institutions, and is being phased-out and eliminated by 1 April 2010.
INVESTMENT TAX CREDITS
The acquisition of qualifying property for use in Atlantic Canada, the Gaspé Peninsula or prescribed offshore regions may qualify for a federal investment tax credit (ITC) of 10%. Qualifying property encompasses a wide range of assets related to manufacturing and processing operations as well as assets used in specific industries.
Qualified expenditures in respect of scientific research and experimental development in Canada qualify for a 20% federal ITC. Certain qualifying CCPCs are entitled to 35% federal ITC on scientific research and development up to specified maximums.
Corporations resident in Canada are eligible for a 10% federal ITC on certain preproduction mining expenditures.
The ITCs may be used to offset federal income taxes payable in the current year, the preceding three years, or the 20 succeeding years. CCPCs may qualify to receive a cash refund when ITCs claimed exceed tax payable for the year. Nine provinces offer provincial tax credits as an incentive for conducting qualifying scientific research and experimental development activities in the province. The amount of federal ITC claimed is included in taxable income in the year following the claim. Provincial credits are generally included in taxable income in the year of entitlement.
Canada has a complex system of determining the tax depreciation in respect of capital assets. Depreciable property is subject to a number of detailed regulations that specify the amount that may be written off in any particular year. There are also a number of detailed restrictions that have the effect of limiting write-offs for depreciable property.
Expenditures for exploration, development and maintenance of resource properties are subject to rules that categorise the expenditures and specify the amounts which may be deducted in a year. Qualifying Canadian exploration costs may be deducted at 100% against any type of income if desired. Canadian development expenses can be deducted at a rate of 30% per year or 100% against the sale of resource properties. Other expenditures are subject to less generous deductions.
Capital assets used all or substantially all in scientific research and experimental development in Canada may also be eligible for a 100% deduction.
Inventory must be valued at the lower of cost or fair market value unless the taxpayer elects to value all inventory at fair market value. Special rules apply for the valuation of animals.
CAPITAL GAINS AND LOSSES
Taxable capital gains are included in taxable income and taxed at normal rates. A capital gain is essentially the proceeds of disposition for a capital property less the aggregate of the cost of the property and costs of disposition. However, only 50% of the gain is taxable. Capital losses may only be used to offset capital gains but may be carried back three years and forward indefinitely, subject to change of control rules.
Non-residents are only taxed on certain specified capital gains.
Dividends received by a private Canadian corporation from another resident corporation are subject to a refundable tax of 33.33% of the amounts received. In the event that the recipient corporation holds 10% or more of the payor corporation (measured by votes and value), taxes payable are based on the amount of tax refunded to the payor corporation as a result of the dividend. Dividends received by most public corporations from another Canadian corporation are effectively excluded from income. Dividends received from non-resident corporations are subject to tax unless received from a subsidiary out of its active business profits from a listed (generally, treaty) country. Other dividends from foreign affiliates are netted against a grossed-up adjustment for the underlying foreign affiliate tax and withholding tax.
Portfolio dividends from foreign corporations are included in taxable income but the recipient is entitled to a foreign tax credit for the foreign withholding tax.
Interest paid on funds borrowed to finance business operations or the acquisition of income-producing assets is generally fully deductible. In certain cases, interest payable relating to the acquisition of bare land is only deductible to the extent the property generates income. The deductibility of interest incurred during the construction of real property is also restricted. Interest payable on funds borrowed to pay dividends is deductible as long as the corporation has taxed retained earnings at least equal to the amount of the dividend. In 1991, the federal government announced its intention to introduce more detailed statutory rules on interest deductibility. These proposals would have the effect of limiting interest deductibility in certain circumstances. Further action on these proposals is not anticipated in the foreseeable future.
There are statutory rules that restrict the deductibility of interest paid to a nonresident shareholder or group that owns 25% or more of the shares of a Canadian corporation. Essentially, these rules prevent the deduction of interest paid to these particular non-residents (or non-residents not dealing at arm's length with them) on outstanding debt that exceeds two times the shareholders' equity. This is measured by taking the aggregate of the retained earnings at the beginning of the year and the average paid-up capital of shares owned by certain non-resident shareholders and related contributed surplus computed on a monthly-average basis.
Losses arising from business operations may be carried back three years and forward 20 years. The carry-forward period increased from seven to ten years and from ten to 20 years for losses arising in taxation years ending after 23 March 2004 and after 31 December 2005 respectively.
In the event of a change of control of a corporation, there is a deemed year-end.
Business losses incurred prior to the change of control may only be deducted in subsequent years from income from the same or similar business but only if the business which generated the losses continues to be carried on with a reasonable expectation of profit. A similar restriction applies to the carry-back of subsequent business losses to the three years preceding the change of control. Unclaimed capital losses expire on a change of control. A special election to trigger unrealised capital gains should be considered when filing a change of control tax return.
On a change of control, a number of complementary rules come into play that have the effect of deeming most types of assets to be disposed of for fair market value proceeds where that value is less than the particular asset's tax carrying value. The purpose of these rules is to crystallise any unrealised losses that may exist at the time of the change of control. These deemed losses are added to the existing losses and are subject to the carry-forward restrictions mentioned above.
FOREIGN SOURCED INCOME
Canadian corporations are taxable on worldwide income regardless of source. Income earned by foreign affiliates in active businesses is generally not subject to taxation in the Canadian parent until the profits are repatriated. Refer to the discussion on Dividends above. Corporations having an investment in a controlled foreign affiliate earning passive income, or deemed passive income, are subject to tax on that income in the year it is earned by the foreign corporation.
FOREIGN TAX RELIEF
Foreign income earned by a Canadian corporation is subject to tax in the year accrued. Credit is given for foreign income taxes paid including withholding taxes. Depending upon the tax rate of the foreign country, foreign tax credits may or may not provide full relief for taxes paid.
Dividends arising from active business income received from foreign affiliates residing in treaty countries are not subject to further tax in Canada if the business is carried on in Canada or a designated treaty country. No credit is given for foreign withholding taxes in these cases. Dividends arising from other business income received from foreign affiliates are netted against a grossed-up adjustment for the underlying foreign tax and withholding tax.
Dividends arising from passive income received from controlled foreign affiliates residing in treaty countries or arising from all sources in non-treaty countries are subject to tax as ordinary income. Credits will be given for underlying foreign tax and withholding tax, as well as Canadian tax which may have been payable at the time the income was earned.
No provision is made for filing consolidated tax returns for corporate groups. Certain tax provisions require the aggregation of amounts for members of related groups for purposes of determining access to certain tax incentives and benefits. Loss utilisation among members of a corporate group is often effected by amalgamation or merger of group members.
RELATED PARTY TRANSACTIONS
Transactions between related parties are subject to a number of rules that require such parties to transfer property at fair market value. Failure to effect transfers at fair market value will result in adjustments of income of the selling or acquiring corporation.
Charges between domestic group members are subject to reasonableness and income earning tests. Transactions with related non-residents are subject to transfer pricing and foreign reporting rules. Substantial penalties may be levied where prescribed procedures relating to transactions with related non-residents are not followed.
Canada imposes non-resident withholding tax on many types of income paid or credited to non-residents including dividends, interest, royalties, management fees, pension payments and rents. The statutory rate of withholding is 25% but this may be reduced or eliminated by treaty provisions. Section I Treaty and Non-treaty withholding tax rates summarises the rates of withholding under Canada's present income tax treaties. As of 1 January 2008, withholding tax is no longer payable on most interest payments made by Canadian borrowers to arm's length lenders.
Canada also has a clearance certificate procedure that requires a purchaser to withhold from the proceeds paid to a non-resident seller on the sale of certain Canadian properties. The amount of withholding is generally 25% (50% for certain types of properties) of the net gain on disposition if proper notice is given to the tax authorities and a clearance certificate is provided to the purchaser. If a clearance certificate is not obtained, the amount of withholding increases to 25% (or 50%) of gross proceeds. Amounts withheld are creditable against Canadian taxes payable by the non-resident seller. In the event that the withholding is excessive, a refund will be given on filing a Canadian federal tax return.
In addition to the federal withholding tax, Quebec has a similar withholding tax regime on sales of Taxable Quebec Property. The general rate of withholding is 12% and can be higher for certain types of property.
Non-residents are also subject to a 15% withholding on amounts received for services rendered in Canada. This withholding is also credited on the non-resident's Canadian income tax return and will reduce the tax due or result in a refund. In addition to the federal withholding tax, Quebec has a 9% withholding tax on services rendered in Quebec by non-residents of Canada.
Canada imposes no currency or exchange controls.
The federal government imposes a goods and services tax (GST) on a wide range of goods and services. The GST was reduced to 5% effective 1 January 2008.
Exemptions are provided for basic foods, health care and education.
All businesses providing taxable services or selling taxable goods in excess of $30,000 in a single calendar quarter or calendar year must register for, and collect, the GST. All taxable purchases from a GST registrant bear the GST. GST paid on purchases made by a registrant is credited against its GST collections on its GST return. A net credit is refunded.
With the exception of the three territories and Alberta, all provinces impose a sales tax on a wide variety of goods and services. General provincial sales tax rates vary from 5% to 10%. In Quebec, the GST and Quebec sales tax systems are essentially harmonised and administered by Quebec.
The federal government and the provinces of Newfoundland, New Brunswick and Nova Scotia are parties to a sales tax harmonisation agreement. On December 9, 2009, Ontario passed legislation to harmonise its provincial sales tax with the federal government effective July 1, 2010. Under the harmonized sales tax (HST) agreement, the four provinces have/will cease(d) to collect provincial sales tax. In its place, the federal government collects HST under the GST rules. The HST was reduced to 13% effective 1 January 2008.
Sales Tax Rates in Canadian Provinces and Territories
BC 12% HST
AB 5% GST
SK 5% GST 5% PST
MB 5% GST 7% PST
ON 13% HST
QC 5% GST 7.5% PST
NL 13% HST
NS 15% HST
NB 13% HST
PE 5% GST 10% PST
NT 5% GST
NU 5% GST
YT 5% GST
Income Tax Rate
Corporate Tax Rate
GST, HST, PST Rate
Last Update: Nov 2010
ANTIGUA & BARBUDA
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BRITISH VIRGIN ISLANDS
CENTRAL AFRICAN REP.
CONGO, DEM. REPUBLIC
CONGO, REPUBLIC OF
ISLE OF MAN
PAPUA NEW GUINEA
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UNITED ARAB EMIRATES
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