Last updated on 9 de April de 2023
Canada is a G-7 country with an advanced economy. In this post we analyze taxes in Canada, so that you can understand how much workers, investors, corporations and consumers pay.
- Taxes on Earned Income
- Capital Income Taxes
- Goods and Services Tax (GST)
- Real Estate Purchase Taxes
- Corporate Tax
- Canada Public Finances
Canada is the ninth largest economy in the world and enjoys a very high per capital income. Additionally, according to HSBC, Canada is one of the top 10 preferred destinations by expats.
To better understand how Canada works, it is essential to know its tax system. This will allow us to assess why things are the way they are.
As you will see, taxes in Canada depend in great part on the province in which we live. In this sense, its tax system resembles that of the United States, where federal states have a lot of flexibility to set their own taxes.
Canada has a total of 13 provinces or, to be more correct 10 provinces and 3 territories. Although 4 of those provinces (Ontario, Quebec, British Columbia and Alberta) concentrate 85% of the population.
The province with the highest tax powers is Quebec, where 23% of the country’s population lives.
The currency of Canada is the Canadian Dollar (CAD). Throughout this post we will see tax figures both in domestic currency as well as their equivalent in US Dollars, at an approximate exchange rate of $1 = 1.5 CAD.
Taxes on Earned Income
Labor income in Canada is subject to both social security payments and income tax:
Social Security contributions in Canada are significantly lower than in most developed countries. They are broken down into two different concepts: pensions (CPP) and unemployment (EI).
In all provinces except Quebec, contributions to the pension system (CPP) are 5.95% for both the employer and the employee. These are paid on annual gross income over CAD 3,500 ($2,333), with a maximum base of CAD 66,600 ($44,400).
In Quebec, both the employer and the employee pay 5.9% of the gross salary as contribution to the Quebec pension system (QPP), with the same minimum and maximum base.
Employment insurance (EI) is paid on the first CAD 61,500 per year ($41,000) in all provinces of the country. In 12 of them, workers pay 1.63% of their gross salary and the employer 2.282%.
In Quebec, workers pay a rate of 1.18%, and the employer 1.65%. This means employers pay 1.4 times what the employee pays in employment insurance.
The following table summarizes all payments that must be made to the Canadian social security:
As you can see, although Quebec has slightly different social security brackets, the final amount to be paid is practically the same.
The Canadian income tax is made up of federal brackets, applicable throughout the country, and provincial brackets, set by each of the 13 provinces and territories.
However, the first CAD 15,000 ($10,000) is tax-exempt. This is the universal deduction.
The federal tranches are as follows:
- 0 to 53,359 CAD ($0 to $35,573): 15%
- 53,359 to 106,717 CAD ($35,573 to $71.145): 20.5%
- 106,717 to 165,430 CAD ($71,145 to $110.287): 26%
- 165,430 to 235,675 CAD ($110,287 to $157.117): 29.32%
- Above 235,675 CAD ($157,117): 33%
Let us remember that, to these federal rates, we must add the corresponding provincial and territorial rates. The minimum and maximum rates in the 4 most important provinces of the country are as follows:
- Ontario: 5.05 to 13.16%
- Quebec: 15 to 25.75%
- British Columbia: 5.06 to 20.5%
- Alberta: 10 to 15%
Total Tax Burden by Province/Territory
To analyze the total tax burden in each of the 13 Canadian provinces and territories, it is useful to compare the employer’s total cost, which includes social security contributions, with the employee’s net salary:
Another way to analyze the same data is to reverse it to see the tax burden in percentage. For comparison purposes, we also see the percentage paid in some of the main states in the USA:
As you can see, the level of taxation on earned income in Canada is pretty high. Low incomes face a tax burden around 25%, while high incomes are close to 50%. In fact, income taxes in Canada are similar to those in California.
Capital Income Taxes
Let us now see how income from savings and investments is taxed in Canada:
Dividends are taxed at the same progressive tax rates as earned income, and subject to both the federal and provincial brackets, so they may end up being higher than 50%.
Another thing to keep in mind is that the taxation of dividends in Canada depends on whether the company paying them is Canadian or not.
If we receive dividends from a Canadian company, taxation will be lower. This is because the calculation of taxes takes into account what the company has already paid in corporate tax. Thus, double taxation is avoided.
Dividends received from foreign companies may end up being double taxed.
Interest, which can come from bank deposits or fixed-income investments, is fully taxed at the same rates as earned income. This means that, for high income earners, more than half of interest income may have to be paid in the form of taxes.
Realized Capital Gains
Capital gains are taxed more favorably than either interest or dividends.
Although the applicable tax rates are exactly the same, we only pay taxes on 50% of the realized capital gain. As a result, the highest effective marginal rate will be slightly above 25% (half of what we would pay if we had to pay taxes on 100% of capital gains).
Income earned from renting real estate is also subject to income taxes. As in most countries, all expenses associated with the ownership of the property are tax-deductible. Thus, things like insurance, mortgage interest or repairs reduce the amount on which we will pay taxes.
However, we must bear in mind that the applicable tax rates can end up being above 50%.
Goods and Services Tax (GST)
VAT or Sales Tax in Canada is known as Goods and Services Tax (GST). It taxes the consumption of most goods and services in the country.
It is composed of a federal tranche of 5%, applicable throughout the country, and a provincial/territorial rate. The following table summarizes the applicable Goods and Services Tax in all 13 regions in Canada:
It is worth mentioning that several products are exempt from GST: most foods, medicines, medical and dental services, education, legal and financial services.
Real Estate Purchase Taxes
The purchase of a home is one of the most important financial decisions in many people’s life. As a result, it is essential to know if it is subject to any type of tax.
In Canada, the acquisition of a house or apartment is subject to the payment of the Land Registry Tax or the Title Transfer Fee, which serve to register the purchase. How much we must pay depends on the value of the property and the province or territory in which it is located.
The following table includes the minimum and maximum rates in each of the 13 Canadian provinces and territories:
As you can see, the main cities in Canada, Toronto and Montreal, have slightly higher rates than those applicable in their respective provinces.
We should also mention that some provinces and territories incentivize the purchase of a first home by applying lower rates than those shown in the table.
Corporate tax in Canada is composed of a federal and a provincial rate, and depends on the type of company and how much profit is has made.
On the one hand, the federal corporate tax rate, which is applicable in all regions of the country, is 9% for companies considered Canadian and private (in general, those not listed on any stock exchange or of foreign foreign), and 15% for the rest.
On the other hand, the federal rate varies depending on the amount of corporate profits. It ranges from very low rates to relatively high.
The following table shows the federal corporate tax rate as well as the provincial minimum and maximum rates. We also see the cap that applies to the minimum rate in each region:
Canada Public Finances
We will next look at the state of Canada’s public finances.
Despite the fact that the country’s federal government has little debt and, as a result, Canada frequently appears as being in a healthy fiscal position, the reality is a lot more complex.
Most public debt in Canada is owed by provincial governments. We have already seen that they have the power to set their own tax rates. And they can also issue their own debt.
The following table includes the level of public debt in the federal and provincial/territorial governments at the beginning of 2021:
Thus, the total level of public debt in Canada is high and rising rapidly. On top of that, the country’s real estate market poses a significant threat to its economy.
Canada is one of the richest countries in the world. It has a lot going for it, including healthy demographics, vast natural resources and an optimal geopolitical situation.
However, it also suffers from many of the problems often seen in Western countries: high taxes, high public spending, public debt and plenty of regulation.
While there are reasons to be optimistic about it, reforms will be needed at some points to make sure it taps into its true potential.
I hope you found this analysis of taxes in Canada helpful and encourage you to subscribe to my newsletter:
And if you want to read a similar analysis about the United States, check out the following link:
Taxes in the United States – A Complete Guide