Understanding Personal Income Tax in Canada: A Comprehensive Guide

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Personal Income Tax

Income tax is a tax levied on individual income earners, organizations, or corporations, by the government within their jurisdiction in conformity with their income or profits. Income tax can come from wages, salaries, dividends, winnings, interests, rents, pensions, commissions, alimony, royalties, profits, capital gains, etc., within a given tax year.

The income tax paid to the government is used to cater for public expenditures, as stipulated by law, and non-compliance attracts strict penalties under the law.

Income taxes in Canada form the major annual revenue of the Canadian government and the provinces. The Canada Revenue Agency (CRA) collects income tax for the federal government, some provinces, and territories.

What is Personal Income Tax?

Personal income tax is the individual income tax levied on wages, salaries, interests, profits, dividends, and other income earned by an individual in a tax year. The government of Canada imposes personal income tax on all income of every individual residing in Canada.

According to the Income Tax Act of Canada, part I, subparagraph 2(1), states: “An income tax shall be paid, as required by this Act, on the taxable income for each tax year of every person resident in Canada at any time in the year.”

Every year, individual residents of Canada must file a T1 Tax and Benefit Return by April 30, while June 15 is for self-employed individuals, their spouses, or common law partners.

Personal income tax rates in Canada are an important source of income for the government, and it refers to the top marginal federal tax rates, which are applied to taxable income, in which each individual is subjected to at least a 15 percent provincial tax rate.

Taxable income can be seen as the amount of income used in the calculation of how much tax an individual income earner owes the government in any tax year. Thus, it is calculated as the Total Income (Gross Income) minus any deductions or exemptions.

How To File For Tax Returns

There are different ways to file your tax return in Canada. Some of them are:

  1. By mail/paper: You can get a paper return from a post office or local tax office or download it from the CRA website, fill and mail it to your local tax office.
  2. Online: You can use Netfile for your tax return online, but you cannot use this service if you are filing your tax returns for the first time. However, you must use only Netfile-certified software, some of which are free.

Filing Personal Income Tax in Canada

Every individual income earner in Canada is expected to file a personal tax return with the Canada Revenue Agency  (CRA), irrespective of their age, gender, or occupation.

A Social Insurance Number is essential to complete your personal income tax return. Tax return in Canada involves the process of reporting the sum of taxable income and tax credits of the previous year.

The process of filing a tax return can either result in a government refund or payment of the due amount by the individual to the government.

Every tax return must be filed by April 30 of the following year for individual employees and June 15 for self-employed people, and there is a levy or penalty imposed on defaulters.

Who is Mandated To File Personal Income Tax?

The Canada Revenue Agency (CRA) requires annual tax filing for most residents and citizens, but there are exemptions. Hence, you must file a Personal Income Tax return if:

  • You owe tax to the CRA.
  • You have to pay tax on income earned in the previous calendar year.
  • The CRA requested that you file a return.
  • You sold or disposed of a property, such as real estate or corporate shares.
  • You have a taxable capital gain or reporting capital gains reserve for a previous year.
  • You are contributing to the Canada Pension Plan (CPP).
  • You and your spouse or common-law partner choose to split pension income in the previous year.
  • You received Working Income Tax Benefit advance payments in the tax year.
  • You paid Employment Insurance premiums on self-employment and other eligible earnings.

Types of Taxable Income

By law, every individual resident and citizen of Canada has to report any taxable income they earn inside and outside Canada whenever they file their tax return. These taxable income include:

  • Rental income, which includes renting out a portion of your home.
  • Any full-time or part-time work.
  • Pensions earned or received.
  • Self-generated income like home business, selling of goods or inline services, tips, etc.
  • Income from investments such as dividends, interests, capital gains, etc

Types of Non-Taxable Income

There are certain individual or personal incomes that you may not necessarily need to report. These are nontaxable income, and they include:

  • Gifts
  • Allowances
  • Lottery winnings
  • Inheritance
  • Scholarships in elementary, secondary, or post-secondary schools.

Tax Rates For The Current Year

For the year 2020, the government of Canada has already stipulated five federal income tax brackets, which are indexed to inflation using a 1.9 percent rate. The 2020 federal brackets are:

  • 0 – $48,535 of income = 15 percent
  • $48,535 – $97,069 of income = 20.5 percent
  • $97,069 -$150,473 of income = 26 percent
  • $150,473 – $214,368 of income = 29 percent
  • Above $214,368 of income = 33 percent.

Each province in Canada also has its own provincial bracket.

How Income Tax Works

All federal taxes are collected by the Canada Revenue Agency (CRA). Equally, the Canada Revenue Agency collects all due taxes for some provinces, including Ontario, on behalf of the provincial government. Every year, each individual earner files a tax return with the Canada Revenue Agency:

  • To report the income, they have made in a year.
  • To ensure that they have paid the right or correct amount of their income tax.
  • To access tax credits, exemptions, and benefits.

Most personal income tax returns are due by April 30, the official date for filing all outstanding tax dues. Failure to file on or before this due date will attract penalties and interests on any outstanding balance owed. It is only self-employed individuals are given the grace of June 15 by the law backing the Canada Revenue Agency.

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Kareena Maya

Personal Finance and Travel Rewards Expert Contributor

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Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.

Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.