Taxation of individuals

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.

2023 federal tax rates range from 15% to 33% for income over 235,675 CAD.

Provincial/territorial income taxes

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 between 11.5% in Nunavut and 25.75% in Quebec. 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.e. they set their own rates, brackets, and credits). All except Quebec use the federal definition of taxable income.

Alternative Minimum Tax (AMT)

In addition to the normal tax computation, individuals are required to compute an adjusted taxable income and include certain 'tax preference' items that are otherwise deductible or exempt in the calculation of regular taxable income. If the adjusted taxable income exceeds the minimum tax exemption of CAD 40,000, a combined federal and provincial/territorial tax rate of about 25% is applied to the excess, yielding the AMT. The taxpayer then pays the greater of regular tax or the AMT. Taxpayers required to pay the AMT are entitled to a credit in future years, when their regular tax liability exceeds their AMT level for that year.

Draft legislative proposals change the federal AMT calculation, effective for taxation years beginning after 2023, by:

• increasing the federal AMT rate from 15% to 20.5% and the AMT exemption from CAD 40,000 to the start of the second from top federal tax bracket (i.e. CAD 165,430 in 2023; to be indexed for 2024 and subsequent years)

• broadening the AMT base through changes to the ‘tax preference’ inclusions in the AMT adjusted taxable income calculation, and

• allowing only 50% of most non-refundable tax credits to reduce AMT.

Kiddie tax

A minor child that receives certain passive income under an income splitting arrangement is subject to tax at the highest combined federal/provincial (or territorial) marginal rate (i.e. up to 55%), referred to as 'kiddie tax'. Personal tax credits, other than the dividend, disability, and foreign tax credits, or other deductions cannot be claimed to reduce the kiddie tax.

‘Income sprinkling’

‘Income sprinkling’ (i.e. shifting income that would otherwise be realised by a high-tax individual [e.g. through dividends or capital gains] to low or nil tax rate family members) using private corporations is restricted by making certain aspects of the ‘kiddie tax’ rules (see above) also apply to adults in certain situations. The ‘split income’ of the adult family member will be subject to tax at the highest combined federal/provincial (or territorial) marginal rate (i.e. up to 55%). Personal tax credits, other than the dividend, disability, and foreign tax credits, or other deductions cannot be claimed to reduce this tax.

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Social Contribution  

For 2023, Canadian-resident employees are required to pay government pension plan contributions of up to CAD 3,754.45 and employment insurance premiums of up to CAD 1,002.45. However, Quebec employees instead contribute a maximum of CAD 4,038.40 in Quebec government pension plan contributions, CAD 781.05 in employment insurance premiums, and CAD 449.54 to a Quebec parental insurance plan.

Starting 1 January 2019, Canadian and Quebec government pension plan contributions were increased by an enhancement that will be phased in over seven years. The enhanced portion of the contributions is deductible, while a credit equal to 15% of the lesser of the base (non-enhanced) amount payable and the required base premiums for the year is allowed in computing an individual's federal taxes payable.

Self-employed persons contribute double the employee's government pension plan contribution (i.e. for 2023, up to CAD 7,508.90, or if in Quebec, CAD 8,076.80) and are permitted to deduct half of the base (non-enhanced) contribution and 100% of the enhanced contribution. The non-deductible portion qualifies for a tax credit. Self-employed persons are not liable for employment insurance premiums but may opt to pay them. Self-employed persons in Quebec must contribute up to CAD 798.98 to the Quebec parental insurance plan.

Taxation of legal persons

As a general rule, corporations resident in Canada are subject to Canadian corporate income tax (CIT) on worldwide income. Non-resident corporations are subject to CIT on income derived from carrying on a business in Canada and on capital gains arising upon the disposition of taxable Canadian property (see Capital gains in the Income determination section for more information). The purchaser of the taxable Canadian property is generally required to withhold tax from the amount paid unless the non-resident vendor has obtained a clearance certificate.

Canadian CIT and withholding tax (WHT) can be reduced or eliminated if Canada has a treaty with the non-resident's country of residence.

The following rates apply for a 12-month taxation year ending on 31 December 2023. For non-resident corporations, the rates apply to business income attributable to a permanent establishment (PE) in Canada. Different rates may apply to non-resident corporations in other circumstances. Non-resident corporations may also be subject to branch tax.

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                                                                               Federal rate (%)

Basic rate                                                                     38.0

Less: Provincial abatement (1)                                    (10.0)

Federal rate                                                                  28.0

Less: General rate reduction or

manufacturing and processing deduction (2)             (13.0)

Net federal tax rate (3, 4)                                              15.0

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1. The basic rate of federal tax is reduced by a 10% abatement to give the provinces and territories room to impose CITs. The abatement is available in respect of taxable income allocated to Canadian provinces and territories. Taxable income allocable to a foreign jurisdiction is not eligible for the abatement and normally is not subject to provincial or territorial taxes.

2. The general rate reduction and manufacturing and processing deduction do not apply to the first CAD 500,000 of active business income earned in Canada by Canadian-controlled private corporations (CCPCs), investment income of CCPCs, and income from certain other corporations (e.g. mutual fund corporations, mortgage investment corporations, and investment corporations) that may benefit from preferential tax treatment.

3. Provincial or territorial taxes apply in addition to federal taxes. Provincial and territorial tax rates are noted below.

4. For small CCPCs, the net federal tax rate is levied on active business income above CAD 500,000; a federal rate of 9% applies to the first CAD 500,000 of active business income. Investment income (other than most dividends) of CCPCs is subject to the federal rate of 28%, in addition to a refundable federal tax of 10⅔%, for a total federal rate of 38⅔%. Access to the reduced federal tax rate on active business income of 9% is restricted for CCPCs that earn passive investment income exceeding CAD 50,000 in the previous taxation year and unavailable at CAD 150,000 of investment income.

 

Provincial/territorial income tax

All provinces and territories impose income tax on income allocable to a PE in the province or territory. Generally, income is allocated to a province or territory by using a two-factor formula based on gross revenue and on salaries and wages. Provincial and territorial income taxes are not deductible for federal income tax purposes. The rates ranging from 8% in Alberta and 14% in Newfoundland and Labrador, apply for a 12-month taxation year ending on 31 December 2023 and do not take into account provincial tax holidays, which reduce or eliminate tax in limited cases.

 
Consumption Taxes - GST and HST

Federal Goods and Services Tax (GST)

The GST is a federal tax levied at a rate of 5% on the supply of most property and services made in Canada. It is a value-added tax (VAT) applied at each level in the manufacturing and marketing chain. However, the tax does not apply to supplies that are zero-rated (i.e. taxed at 0%) or exempt (e.g. used residential real property and most health care, educational, and financial services). Examples of zero-rated supplies include basic groceries, medical and assistive devices, prescription drugs, feminine hygiene products, agriculture and fishing, and most international freight and passenger transportation services.

Generally, registrants charge GST on their sales and pay GST on their purchases, and either remit or claim a refund for the amount of net tax reported (i.e. the difference between the GST charged and the GST paid). Suppliers are entitled to claim input tax credits for the GST paid or payable on expenses incurred relating to making fully taxable and zero-rated supplies (i.e. commercial activity), but not on expenses relating to the making of tax-exempt supplies.

Harmonised Sales Tax (HST)

Five provinces have fully harmonised their sales tax systems with the GST and impose a single HST, which includes the 5% GST and a provincial component. HST applies to the same tax base and under the same rules as the GST. There is no need to register separately for GST and HST because both taxes are accounted for under one tax return and are jointly administered by the CRA. The HST rate is generally 15%.

Provincial retail sales tax (PST)

The provinces of British Columbia, Manitoba, and Saskatchewan each levy a PST (in addition to the 5% GST) at 7%, 7%, and 6%, respectively, on most purchases of tangible personal property, software, and certain services.

PST generally does not apply to purchases of taxable goods, software, and services acquired for resale; registered vendors can claim this resale exemption by providing to their suppliers either their PST number or a purchase exemption certificate. Certain exemptions also exist for use in manufacturing, farming, and fisheries.

PST is administered by each province’s tax authority, separate from the CRA. Unlike GST/HST, PST is not a VAT and could apply to a business’ inputs that are not acquired for resale (e.g. charges for telecommunications services). Therefore, any PST paid on purchases by a business cannot generally be claimed as a credit or otherwise offset against PST charged on sales.

Alberta and the three territories (the Northwest Territories, Nunavut, and the Yukon) do not impose a retail sales tax. However, the GST applies in those jurisdictions.

British Columbia PST

British Columbia requires certain out-of-province vendors to register for PST. Non-residents of British Columbia located:

• in Canada that sell taxable goods, or

• in or outside Canada that sell software and telecommunication services,

to customers for consumption or use in British Columbia are generally required to register for BC PST if their annual revenue from sales in the province exceeds CAD 10,000.

Businesses that facilitate sales or leases of certain goods, services, or software for third parties through their online platform, including accepting payment from a consumer (known as marketplace facilitators), are required to collect and remit BC PST on those sales and leases made in British Columbia. Marketplace facilitators are also required to charge BC PST on marketplace services they provided to resellers.

Manitoba PST

Manitoba requires certain businesses that do not have a physical presence in the province to register for PST. Businesses providing:

• audio and video streaming services

• sales of taxable goods by third parties through online marketplaces, and

• bookings of taxable accommodation through online platforms,

to Manitoba consumers are required to register for Manitoba PST, regardless of whether they have a physical presence in Manitoba.

Saskatchewan PST

Saskatchewan has broad registration requirements for out-of-province sellers. Businesses that operate online selling platforms are required to register for and collect Saskatchewan PST if they:

• create or facilitate the marketplace in which retail sales of tangible personal property, taxable services, or contracts of insurance for consumption or use in or relating to Saskatchewan take place, and

• collect payment from a consumer or user of the tangible personal property, tax, taxable services, or contract of insurance and remit the payment to a marketplace seller.

Out-of-province sellers do not have to register for Saskatchewan PST if they only make sales to customers in Saskatchewan through online accommodation platforms or marketplace facilitators that are registered for Saskatchewan PST.

Quebec sales tax (QST)

Quebec’s sales tax is a VAT structured in the same manner as the GST/HST. The QST is charged in addition to the 5% GST and is levied at the rate of 9.975% on the supply of most property and services made in the province of Quebec, resulting in an effective combined rate of 14.975%. Registrants charge QST on taxable supplies (that are not zero-rated) and can claim input tax refunds for QST paid or payable on their expenses incurred and/or purchases made in the course of their commercial activity. The resulting net tax is reported to Revenu Québec (Quebec’s tax authority) and is either remitted or claimed as a refund. Revenu Québec also administers the GST/HST on behalf of the CRA for most registrants that are resident in the province.

The mandatory QST registration rules also apply to non-residents of Quebec. Suppliers that are not residents of, and have no physical or significant presence in, Quebec, and that make digital and certain other supplies to ‘specified Quebec consumers’ may be required to register for QST under a specified registration system.

The requirement to register also applies to digital property and services distribution platforms in regards to taxable supplies of incorporeal moveable property or services received by specified Quebec consumers if these digital platforms control the key elements of the transaction.

Quebec has harmonised its QST system with the federal GST/HST measures on the digital economy (see above). Operators of distribution platforms that sell foreign goods located in fulfilment warehouses in Canada and operators of short-term accommodation platforms are required to register and collect QST on certain sales made to Quebec consumers.