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A brief introduction to Canadian taxes
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Throughout history, many nations have established many different taxes.
In Canada, there are several taxes, tariffs, and duties. There are also several tax-related benefit programs that the CRA administers.
In this section, we will briefly explain the most common Canadian taxes and benefits. We will look at:
- income tax
- Employment Insurance premiums
- Canada Pension Plan
contributions
- provincial sales taxes
- the goods and services tax
But before we get started, let's check in on Paul.
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After Paul gets his paycheque, he and Omar go to the bank where Paul deposits the cheque and takes out some money to go shopping. They head straight for their favourite music store to buy CDs. On the bus, the subject of taxes comes up again.
"So, if some of my money is taken off my cheque for these deductions, how come you don't pay any tax?" Paul asks Omar.
"Well, I'm not working right now. But I did work in the summer and my Dad told me that I am supposed to send in something called a tax return at the end of the year. I may have to pay some taxes then, because I don't think that the garden centre where I worked in the summer deducted the right amount of money from my pay," replied Omar.
"Will I have to complete one of these returns?" asks Paul.
"Yes, I think so. Since you worked and earned money, you will have to complete a tax return too," replies Omar.
"I still don't understand what this stuff is. What are income tax and EI?" |
Paul wants to know what income tax is, so let's start with that. We will explain more taxes later on.
Income tax is an annual tax collected from individuals and businesses by the CRA for the federal government and the provinces and territories. The amount of income tax that an individual must pay is based on the amount of his or her taxable income (money earned minus allowed expenses) for the tax year.
Income tax is collected in various ways. In Paul's case, his employer deducted income tax from his pay and sent it to the CRA. This is called a source deduction because the deduction was made at the source of the income, by Paul's employer.
Later in the course, we will explain more about income tax and how it is collected. We will also explain how to complete a tax return.
Employers may also deduct Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums from their employees' gross pay. Employers then send these deductions to the CRA.
The Canada Pension Plan is an insurance program designed to help provide you with income for your retirement. In general, if you work in Canada or are self-employed and you are 18 to 70 years old, you become a contributor and must pay into the CPP. If you are an employee, your employer must match your contribution to the plan. The CPP can also provide you with income if you become disabled and benefits may also be paid to your family when you die. Paul doesn't pay CPP yet because he is under 18 years of age.
The Employment Insurance program may provide you with benefits if you become unemployed. In general, your employer must deduct EI premiums from your pay, regardless of your age (as in Paul's case). Self-employed people, however, are not normally included in the EI program. They don't have to pay EI premiums, so they are not eligible for benefits.
Now, let's take a little break and check back in on Paul and Omar.
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When Paul and Omar get to the music store, they listen to a number of CDs. They have, for the moment, forgotten their discussion about taxes.
Eventually, Paul decides to buy one new CD, which he takes to the cashier. When the cashier rings up the price for the CD, Paul notices that the total is higher than the price shown on the CD.
After he has paid for the CD, Paul reads his receipt and says to Omar. "Now they are adding taxes to my CD. These are different from my paycheque. What are these?”
"They have to add sales tax on most of the things we buy. Anyway, let's hurry so we don't miss our bus," Omar replies. |
Provincial sales tax(PST) is a tax that is collected in most provinces when something is sold (like Paul's CD). It is paid on top of the purchase price of the item. The items that are taxed and the tax rate vary from province to province.
Goods and services tax (GST) is a federal tax collected by the CRA and it is charged on the sale of most goods and services in Canada at a consistent rate of 6%. For example, if Paul's CD had cost $10, the GST would have been 60 cents.
However, to help offset the impact of paying the GST, families with low and modest income may qualify for a GST credit (we will discuss this more in the next part of the course).
Would you like more information on the items that are exempt from GST
?
When a buyer pays for an item or a service, the seller collects GST. The seller (an individual or a business) is then responsible for filing a GST return regularly with the CRA. The GST return provides information on how much GST the individual or business has collected and how much has to be paid to the CRA.
In some provinces, the GST is combined with the provincial sales tax and the two are collected together. This is known as harmonized sales tax (HST).
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A brief introduction to Canadian taxes
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