The Canada Revenue Agency (CRA) is the federal agency responsible for administering tax laws and regulations in Canada. It collects taxes, administers tax laws and policies, and delivers tax credits and benefit programs. The CRA’s portfolio covers various areas, including income tax, GST/HST, payroll tax, business numbers, savings and pension plans, benefits and tax credits for individuals, specialty and excise taxes, as well as charities.
For newcomers to Canada, understanding the Canadian tax system and their obligations under it is extremely important. They may, for example, have to register for a business number, file income tax returns, and report their global income. It is advisable for these people to seek professional advice to make sure that are aware of and meet their tax responsibilities in Canada.
The CRA also provides help with debt repayment and offers a variety of services by telephone to help individuals with their tax-related inquiries.
Apart from that, the CRA works with the Digital Transformation Office to make tax information on Canada.ca easier for small business owners to find, understand, and use.
When can a non-Canadian resident be liable to Canadian income tax and how much?
According to the official website of the Canadian government, non-residents of Canada are liable to pay tax on the income they receive from sources in Canada. The type of tax they pay and the requirement to file an income tax return depend mainly on the type of income they receive. Generally speaking, Canadian income received by a non-resident is subject to Part XIII tax or Part I tax.
Part XIII tax will be deducted from the different types of income set out below. To make sure that the right amount is deducted, it’s important to tell the Canadian authorities that you’re a non-resident of Canada for income tax purposes and give them the necessary details about your country of residence.
The most common types of Canadian income that are subject to Part XIII tax include rental and royalty payments, dividends, old age security pension, pension payments, Quebec Pension Plan benefits, Canada Pension Plan benefits, registered retirement savings plan payments, retiring allowances, annuity payments, registered retirement income fund payments, and management fees.
Part I tax is calculated on taxable income earned in Canada by non-residents. The tax rate is the same as the rate for Canadian residents, but non-residents are not entitled to the same tax credits. They are also liable for a 25% withholding tax on passive income such as dividends paid by companies with their head offices in Canada, rents, management fees, pensions, and royalties from Canadian sources.
Non-residents of Canada with taxable income sourced from Canada also have to file a tax return and pay the relevant amount of income taxes. There is, however, no requirement to declare income sourced from outside Canada.
A global perspective: Comparing Canada’s personal and corporate tax systems
The Canadian tax system has long been the subject of both domestic debate and international comparison. Often described as a “polite tax collector,” Canada finds itself in a unique position – having to balance fairly high marginal tax rates with a comprehensive social safety net.
This inevitably raises the question: how does the country’s approach to personal and corporate taxation compare to other developed countries, for example, the United States, the United Kingdom, and the European Union?
Personal income tax: trying to strike a balance
While the fact that Canada’s headline personal income tax rates go up to 33% for high earners may initially raise a couple of eyebrows, a closer look at the details reveals a highly balanced system. Compared to the United States, for instance, Canada has a much higher tax-free threshold. In 2023, a single earner in Canada enjoys a tax-free buffer of $25,730, compared to only $12,950 in the United States. This means that low- and middle-income Canadians enjoy a greater amount of financial freedom than their American counterparts.
A comparison with the UK tells somewhat of a different story. While the UK shares a similar tax-free threshold, its starting tax rate of 20% kicks in sooner, potentially affecting middle-income earners more than in Canada.
The European Union has a significantly more diverse tax system. While the average individual tax burden among EU member states is around 36%, countries like Denmark and Sweden lead the pack with rates that exceed 40%. Against this background, Canada’s 33% maximum tax rate is definitely quite appealing.
Corporate tax
Corporate tax rates paint another interesting picture. The federal corporate income tax rate in Canada is 15%, but provincial and territorial corporate income tax rates range from 8% to 16% and can not be deducted for federal corporate income tax purposes.
Some provinces, for example, Manitoba, British Columbia, and Saskatchewan, also charge a Provincial Sales Tax (PST) in addition to the 5% Goods and Services Tax (GST) This places Canada significantly closer to the American federal tax rate of 21% – although still well below the combined federal and state rates that many US companies have to pay.
The UK, meanwhile, stands out with a fairly low corporate tax rate of 19%. While this has no doubt attracted many businesses looking for a tax haven, it has also raised concerns about fair competition for local companies.
The EU offers somewhat of a mixed bag. While member states such as Ireland draw many businesses with their relatively low corporate tax rates, others, like France, are known for their higher rates and complex tax systems.
Beyond the headline rates
Tax comparisons should not be made solely on the basis of headline tax rates. Tax deductions, tax credits, and social safety nets also play very important roles in determining the total tax burden and its impact on taxpayers.
Canadians, for example, enjoy the benefit of generous tax-free savings accounts for retirement and education, as well as a variety of charitable and medical expense deductions, all of which can significantly reduce their taxable income.
The US, on the other hand, offers a bigger selection of deductions and credits, but these often come with complex eligibility rules and limitations. The UK and the EU have their own unique deduction and credit systems, further complicating direct comparisons.
Finally, one also has to consider the social safety net. While Canadians contribute more through taxes, they enjoy universal healthcare, subsidized childcare, and robust social programs. These benefits, often funded through taxes, contribute to a higher quality of life and a more secure social safety net compared to many other countries.
A guide for those who would like to open a business in Canada
Thinking of setting up shop in Canada? The country welcomes entrepreneurial spirits, but it’s important to know and understand the corporate income tax landscape before diving in. While the headline corporate tax rate of 26.5% (12.2% for small businesses is quite reasonable, one should not forget that this is just the federal portion. Depending on where you choose to base your business, provincial taxes can add another layer, bringing the total to more than 39%.
That is not the full picture, though. Before you get buried under paperwork, let us compare Canada’s tax rates to its neighbors. Compared to the combined federal and state rates in many US states, Canada can actually be a more tax-friendly option for larger businesses. Even the UK’s seemingly lower 19% headline rate can be misleading, as Canada’s generous deductions and credits for expenses like research and development, hiring, and even embracing green technology can significantly reduce your taxable income.
While on the subject of global connections, Canada has your back with a host of tax treaties. These agreements help to avoid double taxation.
One should also not forget about the social safety net. While it might seem like an additional cost on your balance sheet, as we mentioned above Canadians enjoy universal healthcare, education, and other social programs. From a business owner’s point of view, this typically means a healthier, more stable workforce and a reduction of your overall burden in terms of employee benefits.
Of course, there are also other aspects that should be taken into account. Provincial tax rates and credits can vary, so you have to research the specific region where you plan to operate your business.
The exciting part is that Canada actively wants your business to be successful. They offer various programs and incentives, particularly for businesses making waves in innovation and clean technology. So, if you are passionate about pushing boundaries and having a positive impact, you might find some unexpected financial support from the government waiting for you.
The bottom line is that Canada’s corporate tax regime is very competitive, particularly for established businesses. Although the social safety net adds to the tax burden, it also translates to a more secure and productive environment for your firm to thrive. It’s about finding the right balance between tax rates and government support, and Canada offers an impressive product in that regard.
With careful planning, expert guidance, and a willingness to tap into the support Canada offers, your entrepreneurial journey in the Great White North could be richly rewarding, both financially and personally. Your first step should be to find out more about how the Canada ETA system works.
Summary: A refined tax landscape, not a one-size-fits-all approach
Canada is neither the most nor the least taxed nation on earth. It occupies the middle ground, offering a progressive tax system combined with a comprehensive social safety net. While Canadians might pay more tax in certain areas, they also receive more in return.
In the end, the perfect tax system hinges on individual circumstances and priorities. Do you prefer low personal taxes or a stronger social safety net? Do you favour corporate competitiveness or income redistribution? Answering these questions will help you to figure out how Canada’s tax system aligns with your own aspirations and values.
One thing remains certain, though: the global tax landscape is always evolving, yet it stays surprisingly interconnected. Future Canadians should remain informed about the country’s tax system, its strengths and weaknesses, and how it compares to other similar systems. A Canada ETA could be the first step on your exciting journey.