The basics of tax in Canada

Working in Canada? It’s pretty likely you’ll have to pay tax and know the basics of tax in Canada! Here is everything you need to know.

(1) The basics of tax in Canada

Tax Year

The Canadian tax year runs from 1st January – 31st December.

Tax Season

Tax season usually starts in February for the preceding year.

Tax Deadline

The deadline for filing taxes is the end of April of the following year. In other words, tax returns for the 2019 tax year will be due on 30th April 2020.

tax deadline

Tax-free allowance

Most taxpayers in Canada are entitled to a tax-free allowance of $12,069 for 2019 ($11,809 for 2018). This means that you can earn up to this amount without paying federal tax on your income.

90% rule

Under the 90% rule, if you earned more than 10% (net) of your income outside Canada, you can’t avail of the tax-free allowance. However, if you earned 90% of the income within Canada, then you can claim the credits.

Tax Rates

There are two different types of income tax that taxpayers pay – Federal and Provincial.

Canadian tax rates are progressive. The more you earn (over the tax-free allowance), the more tax you’re obliged to pay. For example, Federal tax deductions start from 15% on the first $47,630 of taxable income, with the provincial tax (applied in addition to federal tax) depending on the province that you work in.

Tax Returns

With each payslip, your employer will deduct taxes from your income. After the end of the tax year you should file a tax return in order to check if the correct amount of tax has been deducted over the course of the year.

Tax Refunds

Where your income is below the tax-free threshold, or you have overpaid tax, it is possible to get a refund.

Whether or not you are eligible for a refund depends on three main factors:

  • Overpayment of income tax
  • Overpayment of Canadian Pension Plan (CPP)
  • Overpayment of Employer Insurance (EI)

Tax Refund Calculator

One quick way to establish whether or not you are due a tax refund is by using Taxback.com’s online tax calculator here. Taxback.com’s average Canadian tax refund for working holidaymakers is $998!

Underpayment

Where you have underpaid tax (less tax has been deducted on your payslips than there should have been) during the year, you are legally obliged to file a tax return and to pay the balance due.

(2) Income Tax Rates

Taxpayers with employment income in Canada are liable to pay both Federal and Provincial tax on their earnings.

The Federal Government collects personal income taxes on behalf of all provinces (except Quebec which has its own tax system). There is a tax-free allowance of $12,069 which means you can earn up to this amount without paying federal tax on your income.

However, the more you earn over this figure, the more tax you’re obliged to pay. Federal tax rates start at 15% on the first $47,630 of taxable income and provincial tax rates depend on the province where you work.

Federal Tax Rates and Brackets
The Basics of Tax in Canada-Canadian Federal rates

 

Provincial Tax Rates and Brackets

The Basics of Tax in Canada-Alberta tax rates
The Basics of Tax in Canada- British Columbia tax rates

 

 

The Basics of Tax in Canada- Manitoba tax rates

 

New Brunswick tax rates

Northwest territories tax rates
Nova Scotia tax brackets

 

Nunavut tax brackets

Ontario tax brackets

 

Prince Edward Island tax rates

Quebec Tax Rates

 

Saskatchewan Tax Rates

Yukon Tax Rates

 

Canada Pension Plan

Canada Pension Plan

The Canada Pension Plan (CPP) provides contributors and their families with partial replacement of earnings in the case of retirement, disability or death. Almost all individuals who work in Canada outside Quebec contribute to the CPP. In Quebec, the Québec Pension Plan (QPP) provides similar benefits.

In general, workers are required to contribute 4.95% of gross pay in CPP for each pay period.

Employment Insurance (EI)

All workers contribute 1.63% of gross pay in Employment Insurance (EI) for each pay period.

The EI program provides temporary income support to unemployed workers while they look for employment or to upgrade their skills. The EI program also provides special benefits to workers who take time off work due to illness; pregnancy; caring for a new-born or newly adopted child (and more).

(3) Filing a tax return

Tax return Canada

Every taxpayer in Canada (including working holidaymakers) is legally obliged to file a tax return where they have had to pay tax for the year.

The deadline for filing your tax return and paying any balance of tax due is usually April 30th of the following tax year. While the deadline to file is at the end of April you can choose to file from around mid-February. It is always advisable to file as early as possible and to avoid the ‘deadline rush’.

If you miss the deadline you may be penalized by the Canadian Revenue Office in a case where there is a balance of tax due. If you don’t file your tax return on time, you could incur a penalty fee of 5% on top of anything you may owe to the Canadian government. If you are getting a refund for the tax year there is no penalty for filing late and the term for filing your tax return is 10 years after the end of the tax year.

You can choose to file your tax return yourself, or alternatively, you can use a registered agent like Taxback.com to help file your return.

Tips for filing a tax return

1) Determine your residency status

Your tax obligations are determined by your residency status. In other words, you’ll need to know your status before you can work out what your tax responsibilities are.

There are a number of factors involved in determining your status, including your residential ties with Canada, length of stay, the purpose of your stay, and more.

If you’re on a working holiday in Canada, you’ll generally be classified as a “non-resident” or “deemed non-resident” for tax purposes.

2) SIN and T4

You will need to have a T4 document (or a final cumulative payslip) and your Social Insurance Number (SIN) in order to file a tax return.

You must apply for a SIN before you start a job in Canada and include your SIN on your T4 slip. The T4 slip is a statement of your income and what tax you have paid and it is given to you by your employer after the end of the tax year (usually in February).

If you have had multiple employers during the year you will need to ensure that you get a T4 from each of them.

Understanding the tax that you pay

Generally speaking, you’ll pay three types of taxes.

  • Income tax (displayed in box 22 of your T4)
  • Canadian Pension Plan (CPP – box 16)
  • Employer Insurance (EI – box 18)

If you have overpaid any of these taxes, you will be entitled to a tax refund.

3) Understanding your expenses

If you earned over the tax-free allowance, then you may be able to claim on the cost of certain expenses to reduce your overall tax liability.

Examples of eligible expenses include:

  • Medical (for example – visit to the doctor, prescriptions, and surgery)
  • Travel (for example – monthly transit passes until June 30, 2017)
  • Tuition fees
  • Donations
  • Union dues
  • Business (for example – rent, supplies, travel, and professional fees)

If you intend to use expenses to lower your overall tax liability you will need to ensure that you have proper documentation for each cost. So keep any receipts you have safe!

4) How to file

You can apply directly with the Canadian tax office, or you can use a tax agent such as Taxback.com.

The main benefit of applying directly yourself is that it is free. The main downside is that you will have determine your residency status and gather all the necessary documents yourself. Also, the responsibility of the correct filing of your tax return will lie with you.

By applying with Taxback.com you can enjoy a fast and stress-free service. Taxback.com will handle all of the tax return paperwork, ensure you avail of every expense and relief you are entitled to and retrieve your maximum legal tax refund. What’s more, they can help you to locate any tax documents that you have lost.

Taxback.com have local offices in Banff and Whistler.

Got questions about tax? Check out this jargon-free tax guide for Canadian working holidaymakers