Taxation in Canada
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The level of Taxation in Canada is average among Organisation for Economic Co-operation and Development (OECD) countries. Approximately 70% of the Canadian government's income comes from taxation, the rest from tariffs, fees, and investments.[citation needed]
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[edit] Administration
Federal taxes are collected by the Canada Revenue Agency (CRA), formerly known as "Revenue Canada" or the "Canada Customs and Revenue Agency".
Under "Tax Collection Agreements", CRA collects and remits to the provinces:
- Provincial personal income taxes on behalf of all provinces except Quebec, so that individuals outside of Quebec file only one set of tax forms each year for their federal and provincial income taxes.
- Corporate taxes on behalf of all provinces except Quebec and Alberta.
The Ministère du revenu du Québec collects the GST in Quebec on behalf of the federal government, and remits it to Ottawa.
The provincial governments of Nova Scotia, New Brunswick and Newfoundland and Labrador no longer impose a provincial sales tax and in those provinces the federal government collects goods and services tax at a rate 8% higher than in the other provinces. The additional revenue from this "harmonized sales tax" is paid by the federal government to the three harmonizing provinces.
[edit] History
When the Canadian federation was formed in 1867, the British North America Act attempted to create a federal government with virtually unlimited revenue gathering abilities, except for modes of direct taxation (section 92(2)), which were reserved exclusively to the provinces. The federal government was entrusted with the high cost programs of the time, most notably defence and the building of railways. The provinces were given limited taxation power as they could only impose direct taxes such as sales taxes, property taxes, and income taxes (although they also maintained control over most resource revenues as well). At the time, it was believed that the provinces had adequate revenue sources as major areas of provincial government spending today were generally not funded by the government (such as social assistance and medical care).
For the early part of Canadian history most federal government revenue came from tariffs on trade with excise taxes making up the rest of the government's funding. The largest source of provincial funding was licenses, permits, and transfers of funds from the federal government. The first corporate taxes were introduced at the end of the nineteenth century.
A crisis developed during the Great Depression because the provinces were responsible for skyrocketing welfare costs, but could not raise enough revenue since the taxes permitted to the provinces were so dependent on the health of the economy. The federal government still had considerable revenues however, which resulted in a system of transfer payments between the two levels of government. The transfer payments are still in place today.
The First World War had mostly been financed by traditional means, but in 1917, a tax on income was introduced as a temporary measure to fund the war. The income tax has since become a permanent feature of the Canadian tax system. The Second World War led to dramatic change in the tax system. The percentage of Canadian government revenue from indirect taxes fell from 90% in 1913 to less than 40% by 1946. Instead, Canadians began to pay income taxes and direct taxes has since provided the greatest bulk of government funding.
[edit] Income taxes
[edit] Personal income taxes
Both the federal and provincial governments have imposed income taxes on individuals, and these are the most significant sources of revenue for those levels of government accounting for over 40% of tax revenue. The federal government charges the bulk of income taxes with the provinces charging a somewhat lower percentage. Income taxes throughout Canada are progressive with the high income residents paying a higher percentage than the low income residents.
Where income is earned in the form of a capital gain, only half of the gain is included in income for tax purposes; the other half is not taxed.
Federal and provincial income tax rates are shown at Canada Revenue Agency's website.
Personal income tax can be deferred in a Registered Retirement Savings Plan (RRSP), a tax sheltered savings account or mutual fund that is intended to help individuals save for their retirement.
[edit] Corporate taxes
Companies and corporations pay tax on profit income and on capital. These make up a relatively small portion of total tax revenue. Tax is paid on corporate income at the corporate level before it is distributed to individual shareholders as dividends. A tax credit is provided to individuals who receive dividend to reflect the tax paid at the corporate level. This credit does not eliminate double taxation of this income completely, however, resulting in a higher level of tax on dividend income than other types of income. (Where income is earned in the form of a capital gain, only half of the gain is included in income for tax purposes; the other half is not taxed.) Corporations may deduct the cost of capital following capital cost allowance regulations.
Starting in 2002, several large companies converted into "income trusts" in order to reduce or eliminate their income tax payments, making the trust sector the fastest-growing in Canada as of 2005[update]. Conversions were largely halted on October 31, 2006, when Finance Minister Jim Flaherty announced that new income trusts would be subject to a tax system similar to that of corporations, and that these rules would apply to existing income trusts after 2011.
[edit] Sales taxes
The federal government levies a multi-stage sales tax of 5% (6% prior to January 1, 2008), that is called the Goods and Services Tax (GST), and, in some provinces, the Harmonized Sales Tax (HST). The GST/HST is similar to a value-added tax.
All provincial governments except Alberta levy sales taxes as well. The provincial sales taxes of Nova Scotia, New Brunswick and Newfoundland and Labrador are harmonized with the GST. That is, a rate of 13% HST is charged instead of separate PST and GST. Both Quebec and Prince Edward Island apply provincial sales tax to the sum of price and GST. The territories of Nunavut, Yukon and Northwest Territories do not charge provincial sales tax.
Provincial and federal sales tax rates at the retail level on goods and some services are as follows:
| Province | HST | GST | PST | Total Tax |
|---|---|---|---|---|
| Alberta | 5% | 5% | ||
| British Columbia | 5% | 7% | 12% | |
| Manitoba | 5% | 7% | 12% | |
| New Brunswick | 13% | 13% | ||
| Newfoundland and Labrador | 13% | 13% | ||
| Nova Scotia | 13% | 13% | ||
| Ontario | 5% | 8% | 13% | |
| Prince Edward Island | 5% | 10% | 15.5%* | |
| Quebec | 5% | 7.5% | 12.875%* | |
| Saskatchewan | 5% | 5% | 10% |
* in Québec and PEI, PST is calculated on the total price including GST
[edit] Property taxes
The municipal level of government is funded largely by property taxes on residential, industrial and commercial properties. These account for about ten percent of total taxation in Canada.
[edit] Excise taxes
Both the federal and provincial governments impose excise taxes on inelastic goods such as cigarettes, gasoline, alcohol, and for vehicle air conditioners. A great bulk of the retail price of cigarettes and alcohol are excise taxes. The vehicle air conditioner tax is currently set at $100 per air conditioning unit. Canada has some of the highest rates of taxes on cigarettes and alcohol in the world. These are sometimes referred to as sin taxes.
[edit] Payroll taxes
Ontario levies a payroll tax on employers, the "Employer Health Tax", of 1.95% of payroll. Eligible employers are exempt on the first $400,000 of payroll. This tax was designed to replace revenues lost when health insurance premiums, which were often paid by employers for their employees, were eliminated in 1989.
Quebec levies a similar tax called the "Health Services Fund". For those who are employees, the amount is paid by employers as part of payroll. For those who are not employees such as pensioners and self-employed individuals, the amount is paid by the taxpayer.
Premiums for the Employment Insurance system and the Canada Pension Plan are paid by employees and employers. Premiums for Workers' Compensation are paid by employers. These premiums account for 12% of government revenues. These premiums are not considered to be taxes because they create entitlements for employees to receive payments from the programs, unlike taxes, which are used to fund government activities. The funds collected by the Canada Pension Plan and by the Employment Insurance are in theory separated from the general fund. It should be noted that Unemployment Insurance was renamed to Employment Insurance to reflect the increased scope of the plan from its original intended purpose.
Employment Insurance is unlike private insurance because the individual's yearly income impacts the received benefit. Unlike private insurance, the benefits are treated as taxable earnings and if the individual had a mid to high income for the year, they could have to repay up to the full benefit received.
[edit] Health and Prescription Insurance Tax
Ontario charges a tax on income for the health system. These amounts are collected through the income tax system, and do not determine eligibility for public health care. The Ontario Health Premium is an additional amount charged on an individual's income tax that ranges from $300 for people with $20,000 of taxable income to $900 for high income earners. Individuals with less than $20,000 in taxable income are exempt.
Quebec also requires residents to obtain prescription insurance. When an individual does not have insurance, they must pay an income-derived premium. As these are income related, they are considered to be a tax on income under the law in Canada.
Other provinces, such as British Columbia, charge premiums collected outside of the tax system for the provincial medicare systems. These are usually reduced or eliminated for low-income people.
Alberta does not levy any taxes or premiums for its provincial medicare [1].
[edit] Inheritance tax
Since the government of Pierre Trudeau repealed Canada's inheritance tax in 1972, estates have been treated as sales upon death, and are subject to the same capital gains taxation as, for example, the sale of nonresidential properties or securities in the final personal income tax return the executor of the estate files on behalf of the decedent. Capital gains taxes nominally due upon death can be deferred for two generations by setting up a family trust, though this is cost effective only for very large estates.
[edit] International taxation
Canadian individuals and corporations pay income taxes based on their world-wide income. They are protected against double taxation through the foreign tax credit, which allows taxpayers to deduct from their Canadian income tax otherwise payable from the income tax paid in other countries. A citizen who is currently not a resident of Canada may petition the CRA to change his status so that income from outside Canada is not taxed.
[edit] International comparison (personal income tax)
| Comparison of taxes paid by a household earning the country's average wage (as of 2005) | ||||||
|---|---|---|---|---|---|---|
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| Country | Single no children |
Married 2 children |
Country | Single no children |
Married 2 children |
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| Australia | 28.3% | 16.0% | Korea | 17.3% | 16.2% | |
| Austria | 47.4% | 35.5% | Luxembourg | 35.3% | 12.2% | |
| Belgium | 55.4% | 40.3% | Mexico | 18.2% | 18.2% | |
| Canada | 31.6% | 21.5% | Netherlands | 38.6% | 29.1% | |
| Czech Republic | 43.8% | 27.1% | New Zealand | 20.5% | 14.5% | |
| Denmark | 41.4% | 29.6% | Norway | 37.3% | 29.6% | |
| Finland | 44.6% | 38.4% | Poland | 43.6% | 42.1% | |
| France | 50.1% | 41.7% | Portugal | 36.2% | 26.6% | |
| Germany | 51.8% | 35.7% | Slovak Republic | 38.3% | 23.2% | |
| Greece | 38.8% | 39.2% | Spain | 39.0% | 33.4% | |
| Hungary | 50.5% | 39.9% | Sweden | 47.9% | 42.4% | |
| Iceland | 29.0% | 11.0% | Switzerland | 29.5% | 18.6% | |
| Ireland | 25.7% | 8.1% | Turkey | 42.7% | 42.7% | |
| Italy | 45.4% | 35.2% | United Kingdom | 33.5% | 27.1% | |
| Japan | 27.7% | 24.9% | United States | 29.1% | 11.9% | |
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| Source: OECD, 2005 data [2] | ||||||
[edit] References
[edit] See also
- Deposit Interest Retention Tax
- Dividend tax
- Fiscal neutrality
- International taxation
- Laffer curve and the optimal tax rate argument
- Registered Retirement Savings Plan (RRSP)
- Revenue On-Line Service
- Surrogatum Principle
- Tax incidence
- Tax avoidance/evasion
- Tax resistance
- Tax haven
- Tax law
[edit] External links
- The Department of Finance, Canada - responsible for Canadian tax policy
- Canada Revenue Agency - administers tax law for the federal and most provincial governments
- Amounts that are not taxed - Sources of income that are not subject to taxes in Canada.
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