Canadian Taxation

Canadian Taxation of Individuals by Ms_J_in_VanCity

Residence Status

The major determination of whether a person is subject to tax in Canada is based on an individual’s residence status. If you are deemed or otherwise determined to be a resident of Canada, you are taxable on your worldwide income; if you are deemed or treated as a non-resident of Canada, you are taxed on Canadian source income only.

For most of you coming to Canada, in the year of entry, you would most likely be treated as a part year resident of Canada ie. for the first part of the year, you would be treated as a non-resident (taxed only on Canadian source income) and for the remainder of the year (when you set up residence in Canada), you would be taxed on worldwide income as you would be treated as a resident of Canada.

The tax statutes do not define what “residence” means. Whether a person is treated as a resident of Canada is based on the facts and circumstances. Canada Revenue Agency (the “CRA”) is the federal taxing authority (website: www.cra.gc.ca). The CRA has an Interpretation Bulletin, IT221, Determination of Residency Status which would be useful as a guideline. The most important factor is whether the person has established residential ties with Canada. Residential ties would include:

  • Dwelling place in Canada (owned or rented)
  • Spouse or common law partner and dependants who move to Canada to live with you
  • Personal property, such as a car or furniture
  • Social ties in Canada

If you apply for and obtain landed immigrant status and provincial health coverage, you will most likely be determined to be a resident of Canada.

Even if you have not established sufficient residential ties with Canada, if you are temporarily present in Canada for a total of 183 days or more in any calendar year, you may be deemed to be a resident of Canada for the entire year unless you are determined to have non-resident status under an Income Tax Treaty that Canada has with the country you were a resident of (the Country you were filing tax returns as a resident). The rules are complex and consultation with a qualified tax advisor would be prudent to avoid paying unnecessary taxes in Canada or double tax.

Income Tax Rates

The tax rate consists of the federal marginal tax rate and the provincial/territorial marginal tax rate:

  • Federal rate has four tax brackets:
    • 15% on the first $41,544 of taxable income, +
    • 22% on the next $41,544 of taxable income (on the portion of taxable income between $41,544 and $83,088), +
    • 26% on the next $45,712 of taxable income (on the portion of taxable income between $83,088 and $128.800), +
    • 29% of taxable income over $128,800

 

  • The BC tax rate has five tax brackets:
    • 5.06% on the first $36,146 of taxable income, +
    • 7.7% on the next $36,147, +
    • 10.5% on the next $10,708, +
    • 12.29% on the next $17,786, +
    • 14.7% on the amount over $100,787
  • Therefore, the top marginal combined rate for someone who is resident in BC is 43.7%.

The province with the lowest top marginal rate is Alberta at 10% compared to BC’s top rate of 14.7%. As the determination of the provincial tax rate is where you reside on December 31
For tax planning, some BC residents go to Alberta and claim they are residents of Alberta on December 31 to obtain the lower provincial marginal tax rates.

There is no estate or gift tax but provincial probate fees apply.

Tax Filings

Unlike the US where joint returns can be filed for married couples, in Canada, you file as an individual on Form T1 General, “Income Tax and Benefit Return” (“T1 Return”).

The T1 Return is based on the calendar year and is due on or before April 30th of the following year. Even if you have a refund, you should make sure you timely file as there are some Forms that are included with the T1 Return that must be timely filed in order to make certain elections or to avoid late filing penalties.

There are tax programs you can buy to complete your T1 Return if it is fairly straight forward: TaxPrep, CanTax or TurboTax. You can also go to H&R Block, but if your situation is not as straightforward, a tax advisor is strongly advised.

Keeping Records

The T1 Return can be EFiled so original documents should be retained in case you are subject to an income tax audit and original documents are requested.

Generally, any assets you own prior to coming to Canada will have a bump up in the cost basis to the fair market value at the date you become a resident of Canada. For example, any stocks or mutual funds you own prior to coming to Canada, when you enter Canada, obtain information from your broker or investment advisor to show the fair market value at that date (or close to that date) and retain for your records. If you sell the assets while a Canadian resident, you will only be taxed in Canada on any gain accrued since you became a resident – any gain prior to entering Canada would generally not be taxed. If you have assets ie. capital property or investments, please consult with a tax advisor.
This article is not meant to be exhaustive and cannot be relied upon as professional advice.

2 Comments

  • admin
    November 3, 2011 - 6:45 am | Permalink

    Ms_J,
    How long are we supposed to keep our records on file in case of audit?

    Also, are mortgage payments considered tax deductible in Canada? What else can be deducted?

    Thank you,
    This is great information!

    • Ms_J_in_VanCity
      November 6, 2011 - 7:11 pm | Permalink

      Hi Guys,

      Great job on the website and thank you for allowing me to contribute to this site! Glad I can impart some general information on Canadian taxes.

      Generally, there is a 3 year rule from the date the original Notice of Assessment (“NOA”) is issued by the CRA. The Notice of Assessment essentially acknowledges that you filed your return and summarizes the amounts reported by you. You have 3 years from the date noted on the NOA to make changes to your tax return and the CRA can do the same. However if you had losses in the current year and you carried it back to be applied to a previous tax return, then that previous return stays open for 6 years. Also, if you carry on business, you must keep records and books of account and at a minimum, you would need to keep the books and records for 6 years.

      Unlike the US where you can deduct mortgage interest on your principal residence or tax preparation fees, in Canada, the deductions are more restrictive.

      There are two types of deductions: those that reduce your taxable income and those that reduce your tax liability ie. non-refundable tax credits.

      Contributions to a Registered Retirement Savings Plan (“RRSP”), which provides tax free savings for your retirement, are generally deductible in reducing your taxable income; however, this is based on your prior year’s earned income (which essentially is your employment income). Another deduction from taxable income would be investment fees ie. investment advisor fees, safety deposit box fees (which holds your investment certificates) and accounting fees to keep records of your investments (some people try to deduct their tax preparation fees, but upon audit by the CRA, you may be denied this deduction).

      The common non-refundable tax credit is charitable donations. If you are at the top marginal tax bracket in BC, then every qualifying donation totaling over $200 in a calendar year, you get a tax credit of 43 cents for every dollar given; for the first $200 in donations, the tax credit is at a lower rate ie 20 cents for every dollar given.

      The discussion above is not meant to be exhaustive and cannot be relied upon as professional advice.