Taxation in Canada involves the assessment and collection of taxes at each level of government, including federally, provincially and territorially, and locally. The collection of federal, provincial and territorial income taxes is mainly administered by the federal government through the Canada Revenue Agency, which then remits the provincial and territorial shares to the relevant provinces and territories. The exception is Quebec, where Revenu Québec administers the collection of provincial income tax.
Taxes are levied on various income sources, including income, payroll, property, sales, capital gains, dividends, imports, among others; various fees are additionally imposed. As of 2024, taxes collected at the federal, provincial and territorial, and local levels of government amounted to 34.9% of the country's total GDP, above the OECD average of 34.1% of GDP.
The income tax policy of Canada is based on the progressive model of taxation, with individuals and businesses paying a higher percentage of tax as the amount of income earned increases.
Constitutional authority
Under the Constitution Act, 1867, taxation powers are vested in the Parliament of Canada under s. 91(3) for:
The provincial legislatures have a more restricted authority under ss. 92(2) for:
The provinces also have a taxation power relating to provincial natural resources, set out in s. 92A of the Constitution Act, 1867:
In turn, the provincial legislatures have authorized municipal councils to levy specific types of direct tax, such as property tax.
The powers of taxation are circumscribed by ss. 53 and 54 (both extended to the provinces by s. 90), and 125, which state:
Nature of the taxation power in Canada
Since the 1930 Supreme Court of Canada ruling in Lawson v. Interior Tree Fruit and Vegetables Committee of Direction, taxation is held to consist of the following characteristics:
it is enforceable by law; imposed under the authority of the legislature; levied by a public body; and intended for a public purpose.
In order for a tax to be validly imposed, it must meet the requirements of s. 53 of the Constitution Act, 1867, but the authority for such imposition may be delegated within certain limits. Major J noted in Re Eurig Estate:
This was endorsed by Iacobucci J in Ontario English Catholic Teachers' Assn. v. Ontario (Attorney General), and he further stated:
Taxation vs regulatory charge
In Westbank First Nation v. British Columbia Hydro and Power Authority, the SCC declared that a government levy would be in pith and substance a tax if it was "unconnected to any form of a regulatory scheme." The test for a regulatory fee set out in Westbank requires:
a complete, complex and detailed code of regulation; a regulatory purpose which seeks to affect some behaviour; the presence of actual or properly estimated costs of the regulation; and a relationship between the person being regulated and the regulation, where the person being regulated either benefits from, or causes the need for, the regulation.Westbank First Nation, par. 44
In 620 Connaught Ltd. v. Canada (Attorney General), the Westbank framework was qualified to require "a relationship between the charge and the scheme itself." This has resulted in situations where an imposition can be characterized as neither a valid regulatory charge nor a valid tax. In Confédération des syndicats nationaux v. Canada (Attorney General), a funding scheme for employment insurance that was intended to be self-financing instead generated significant surpluses that were not used to reduce EI premiums in accordance with the legislation. It was therefore held to be contrary to the federal unemployment insurance power under s. 91(2A) and thus not a valid regulatory charge, and there was no clear authority in certain years for setting such excess rates, so it was not a valid tax.
Direct vs indirect taxation
The question of whether a tax is "direct taxation" (and thus falling within provincial jurisdiction) was summarized by the Judicial Committee of the Privy Council in Attorney General for Quebec v Reed, where Lord Selborne stated:
"Indirect taxation" has been summarized by Rand J in Canadian Pacific Railway Co. v. Attorney General for Saskatchewan in these words:
When the definition of "direct taxation" is read with s. 92(2)'s requirement that it be levied "within the Province", it has been held that:
provincial taxes must fasten onto provincially located persons, property or transactions, or to extraprovincial persons conducting economic activity within the province they may not be levied on goods destined for export they must not impede the flow of interprovincial trade
Licensing fees and regulatory charges
Allard Contractors Ltd. v. Coquitlam (District) held that:
provincial legislatures may charge a fee that is of an indirect nature, where it is supportable as ancillary or adhesive to a valid regulatory scheme under a provincial head of power. in obiter, La Forest J's observation was cited with approval that s. 92(9) (together with the provincial powers over property and civil rights and matters of a local or private nature) allows for the levying of license fees even if they constitute indirect taxation.
Administration
Federal taxes are collected by the Canada Revenue Agency (CRA). Under tax collection agreements, the CRA collects and remits to the provinces:
provincial personal income taxes on behalf of all provinces except Quebec, through a system of unified tax returns. corporate taxes on behalf of all provinces except Quebec and Alberta. the portion of the Harmonized Sales Tax that is in excess of the federal Goods and Services Tax (GST) rate, with respect to the provinces that have implemented it.
Revenu Québec collects the GST in Quebec on behalf of the federal government, and remits it back to the federal government.
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Income taxes
The Parliament of Canada entered the field with the passage of the Business Profits War Tax Act, 1916S.C. 1916, c. 11 (essentially a tax on larger businesses, chargeable on any accounting periods ending after 1914 and before 1918). It was replaced in 1917 by the Income War Tax Act, 1917SC 1917, Chap. 28 (covering personal and corporate income earned from 1917 onwards). Similar taxes were imposed by the provinces in the following years.
ProvinceIntroduction of personal income taxIntroduction of corporate income taxTax collection assumed by federal governmentPersonal tax collection resumed by provinceCorporate tax collection resumed by provinceCorporate tax collection resumed by federal government British Columbia 18761901 1941introduced under the Wartime Tax Rental Agreement Alberta 19321932 1941 1981 Saskatchewan 19321932 1941 Manitoba 1923 1924 1938SM 1937, c. 43; SM 193738, c. 39 Ontario 1936SO 1936, c. 11932SO 1932, c. 8 1936SO 1936, c. 1, s. 76, subsequently authorized by Order in Council P.C. 1081 of May 14, 1937 1947 2009 Québec 19391932 1940 1954 1947 New Brunswick 1941 Nova Scotia 1941 Prince Edward Island 18941894 1938SPEI 1937, c. 18; SPEI 1938, c. 10 Newfoundland and Labrador 1949
Municipal income taxes existed as well in certain municipalities, but such taxation powers were gradually abolished as the provinces established their own collection régimes, and none survived the Second World War, as a consequence of the Wartime Tax Rental Agreements.
From 1850, municipal councils in Ontario possessed authority to levy taxes on income, where such amount was greater than the value of a taxpayer's personal property. The personal property limitation was removed with the passage of the Assessment Act in 1904. By 1936, some 200 councils ranging in size from Toronto to Blenheim Township were collecting such taxes. Toronto levied personal income taxes until 1936, and corporate income taxes until 1944. From 1855 to 1870, and once more from 1939,SQ 1939, ch. 102 income tax was imposed on residents of Quebec City. In 1935, a municipal income tax was imposed on the income of individuals resident or doing business in Montreal and the municipalities of the Montreal Metropolitan Commission., by virtue of SQ 1934, ch. 112 Similar income taxes were also imposed in Sherbrooke from 1886 to 1912, in Sorel from 1889, and Hull from 1893. In Prince Edward Island, Summerside had an income tax from 1870 to 1880, and Charlottetown imposed one from 1880 to 1888. While Nova Scotia permitted municipal income tax in 1835, Halifax was the first municipality to levy one in 1849. New Brunswick allowed the collection of income taxes in 1831. However, serious enforcement did not begin until 1849, but it was only in 1908 when all municipalities in the province were required to collect it.
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 45% of tax revenue. The federal government charges the bulk of income taxes with the provinces charging a somewhat lower percentage, except in Quebec. Income taxes throughout Canada are progressive with the high income residents paying a higher percentage than the low 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.
Settlements and legal damages are generally not taxable, even in circumstances where damages (other than unpaid wages) arise as a result of breach of contract in an employment relationship.
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) (which may include mutual funds and other financial instruments) that are intended to help individuals save for their retirement. Tax-Free Savings Accounts allow people to hold financial instruments without taxation on the income earned.
Corporate taxes
Companies and corporations pay corporate 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. The Supreme Court of Canada has interpreted the Capital Cost Allowance in a fairly broad manner, allowing deductions on property which was owned for a very brief period of time, and property which is leased back to the vendor from which it originated.
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 . 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.
Capital tax is a tax charged on a corporation's taxable capital. Taxable capital is the amount determined under Part 1.3 of the Income Tax Act (Canada) plus accumulated other comprehensive income.