Disclaimer: Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.
Income tax is something that everyone must deal with at some point in their lives. Still, many people don’t fully understand how it works in Canada. All we know is that taxes are a necessary evil. We have to pay them every year, and they seem to take more from us each time we do it. But what if you could understand how the system works? What if you knew how your money is spent? Wouldn't that make paying taxes a little easier? We are here to answer this question: How does income tax return work in Canada? Let's get started!
What is Income Tax?
Income tax is the percentage acquired by the government from groups’ or individuals’ income, and it has the following classifications:
- Personal income tax: You are obliged to pay a percentage of your gross income to the government, which will be deducted from your monthly salary.
- Corporate income tax: Corporate income tax works almost the same as personal income tax, but the computation is on a company income level.
- Partnership income tax: If your company operates through partnership funding, it is a requirement for each partner to report their net income and loss individually. Although, there is no need to pay.
- Trust income tax: Income from Canadian Income Trust is also taxable. You are to pay taxes if you acquire a specific income amount determined by the government.
After payment, the government computes and gives back an income tax return for any excess fees you paid throughout the year.
What is the role of the Canada Revenue Agency (CRA)?
The CRA is Canada’s tax-collecting agency that ensures all tax laws are implemented and followed accordingly. Individual, corporate, and trust income taxes along with Goods and Services Tax (GST) and Harmonized Sales Tax (HST) are all registered, processed, and paid in this office. If you are running a company, you need to create your business number registration so that if you have several employees, you can create an account to report and send income deductions you make from your workers to the CRA.
If you are eligible for the Child and Family Benefits, you can also get payments from this office. It also handles Pension Plans for retirement, savings, registered education, and disability benefits.
Charging customs duties like excise duties, excise taxes, tariff, fuel, and security charges are also under CRA’s jurisdiction.
Who should pay taxes in Canada?
Generally, all residents and workers in Canada are required to pay income tax returns. However, you still have to check the full guidelines set by the CRA to know where your situation falls in these categories:
- Canadian residents
- Canadian immigrants
- Spouse of a deceased taxpayer
- Indigenous peoples
- “Factual” residents
- Emigrants
- Government employees
- Non-resident
- Non-resident with rental income
- Living part-time in the US
- Lived in Canada for more than 183 days
- International students
- Seasonal workers
All these have specific income tax return payment requirements. For instance, for “factual residents” who are Canadian residents but live in another country for most of the year, the tax requirement of a regular Canadian resident still applies. To ensure that you are following tax laws, inquire with the CRA about your situation.
When is the tax deadline?
Birthdays, anniversaries, and holidays—there are a lot of dates to remember in a year, and one of them should be the deadline for your taxes! Mark these dates: it is best to pay ahead rather than late.
April 30: For regular individual taxes, corporate income tax returns, and for GST/HST
June 15: For self-employed individuals and their spouses
April 30 or six months after death date: Taxes of deceased taxpayer to be paid by the surviving spouse
June 30 the following year: Tax filing of Canada non-residents
Because of the pandemic, you may follow a prolonged tax deadline, depending on the CRA. So keep yourself updated. If you pay beyond the deadline, it will still be accepted, but you must prepare for additional late filing charges. Heavier repercussions are given to individuals who do not pay taxes at all.
How does income tax work in Canada?
Make it a habit to settle your taxes before the tax deadline and be prepared with the following details in your income report:
- Covid19 benefits (if any)
- Self-employment income
- Foreign investments
- Other sources of income
In paying taxes, finding, and claiming deductions, credits, and expenses, get copies of the necessary forms such as T3, T4, T5, and T2202 slips online and accomplish them fully.
It is best to create a direct deposit account for the faster processing of payments and refunds. Then, always make sure that your record on the CRA is up-to-date and accurate. Settle your taxes and file for tax returns, and make sure to check your payment status afterward to ensure your profile is updated.
How much should I pay?
Check the Canadian tax brackets to know how much exactly you need to pay. Keep in mind that you need to pay both federal tax plus provincial and territorial tax.
These are the federal tax rates for 2021 you need to remember.
| Tax Rate | Taxable income bracket |
| 15% | on the first $49,020 of taxable income |
| 20.5% | on the next $49,020 of taxable income/49,020 up to $98,040 |
| 26% | on the next $53,939 of taxable income/$98,040 up to $151,978 |
| 29% | on the next $64,533 of taxable income/151,978 up to $216,511 |
| 33% | taxable income over $216,511 |
You will be charged for provincial and territorial taxes depending on your status: single, married filing jointly, married filing separately, and head of household. Tax rates range from 10%, 12%, 22%, 24%, 32%, 35%, to 37%.
How can I pay my taxes?
After all the hard work you put into tax computation, you can pay your total income tax (Canada) through the following methods conveniently.
- Online banking
- Paying personally in a bank
- Through CRA’s MyPayment
- Credit card via PaySimply and Plastiq
- Through different Service providers like Canada Post, ADP, Wave Payroll, Rise, and Plooto
- Pre-authorized debit
- Cash paid through Canada Post
- Debit card
After sending your payment, do not forget to confirm if the money has been received. For tax debts, you can set up a meeting with a CRA member or give them a call to determine how much you need to pay and how often. Although the payment computation differs, you can use the same payment methods mentioned above to pay the tax debt.
What happens if I don’t pay my taxes?
It is fine to know what happens if you do not pay taxes so that the repercussions will always drive you to pay on time. Some individuals think that they can run off without the CRA, but this could actually cause more losses. The CRA will come after you, and here are the possible repercussions if you do not pay your taxes:
- CRA can lay its hands on your assets and bank accounts.
- Wage garnishment so CRA can acquire what you owe them straight from your salary.
- Home lien registration
- CRA will apply interest rates for the period you were not able to pay taxes
These regulations are tough, but despite that, the CRA is still open to negotiations and hearing the taxpayer’s side. So with that, individuals with tax debt can set up a meeting with the CRA to find out what happened and lay out a payment plan without putting that person’s ability to live a comfortable life at risk.
Where do my taxes go?
The Government acquires taxes from constituents to fund different projects. In Canada, if you ever wonder where your taxes go, here they are:
- Education: libraries and schools
- Community leisure activities: parks, playgrounds, sports centers
- Roads and infrastructure: bridges, highways, government buildings
- Health care: hospitals, medicines, treatment facilities
- Peace and order: police, military
- Safety: ambulance, fire department needs, prison
- Economy: subsidies for businesses, support for local businesses
- Agriculture: different projects for farmers
- Research: funding of researches deemed of high importance and impact
- Environment: wildlife protection, environment, and natural resources conservation
- Old Age Security: retirement plans and pension
- For children: childcare benefits
- Employment insurance: for pregnant women, new parents, and individuals with temporary disability
- Salaries: for parliament members and staff and workers of different government departments
- For provincial governments: dispersing funds to other provinces for equal growth and services
- Public debt
- Charities and other worthy programs and causes
Aside from enjoying these services, you also allow other members of the community to have a better life.
How can I make tax paying an easy job for me?
Taxes seem to be a considerable task when you are prepared for it, but when done right, you’ll see that it is as easy as 1,2,3. Let us help you make the next tax season better through these tips.
Be aware of tax laws: It is best to familiarize yourself with the Income Tax Act, but if you can’t, at least know your responsibilities on paying taxes—when and how to pay.
Use bookkeeping and accounting software: if you have just begun your business, you can use different accounting and bookkeeping software for your data storage. When your business expands, you can let trained accountants and bookkeepers continue the task for you.
Hire a bookkeeper and accountant: A whole year of income and expenses with tons of documentation and receipts are difficult to backtrack and cram weeks before the tax deadline. Having a bookkeeper to help you track and record everything as they happen will be of great help. An accountant, on the other hand, enables you to make sense of data and numbers. They can give you insights and help you in your next business steps.
Get Assistance From Unloop!
Here at Unloop, we have bookkeeping services to assist you in tracking your income and expenses, so when tax season comes, computation and filing will be more straightforward. We use Quickbooks, A2X, and Hubdoc to make everything automated and your document protected. If there are any questions left unanswered, get in touch with us. We will be happy to answer them for you!Taxes are a necessary evil. But, you can make it an easy job for yourself if you know what to do. We hope that we’ve answered your question, “How does income tax in Canada work?” and everything in between so that your tax filing is as stress-free as possible.