Global expansion is a great way to grow your business and Canada offers many appealing opportunities. However, the tax laws can be complex and require time-consuming research. By using our PEO-service, we will take care of the complicated legwork so that you can focus on your business goals in Canada.
Dealing with employment, tax, and payroll from overseas is always a tricky process and poses complications that demand expert guidance. This is especially so when setting up an international presence in Canada. Individual and corporate taxes apply at the federal level as well as being imposed by the 10 provinces and three territories, with the province of Québec usually operating independently.
We have made it our goal to keep track of the latest changes in the tax policies to always ensure complete compliance. To keep you informed and updated too, we created this guide which includes the basic facts regarding tax regulations in Canada.
Overview of Taxes in Canada
- Individual Income Tax: 15% - 33%, applies to residents and non-residents.
- Social Insurance Taxes: Employment Insurance (EI) - Employee contribution 1.58%, Employer contribution 2.212%; Canada Pension Plan (CPP) - Employee and Employer each contribute 5.25%
- Corporate Income Tax (CIT): Federal rate - 15.0%, Provinces and Territories apply varying rates - 8.0% - 16%
- Capital Gains Tax: Rate applied to capital gain - 50.0%
- Indirect Taxes: Federal Goods and Services Tax (GST) and 5% Harmonized Sales Tax (HST).
Canada Individual Tax – Single, Married
Canadian residents are taxed on their worldwide income. Taxpayers pay income tax to the federal government and to the government of the province/territory where they live. In all provinces/territories, except Québec, the federal government collects the provincial/territorial tax and passes it to those authorities to fund various programs.
The provinces and territories apply their own tax rates and bands.
Canada’s income tax system is progressive, meaning low-income earners are taxed at a lower percentage than high earners. Income tax rates for 2021 were set at:
- CAD 0 - CAD 49,020 (US$38,940): 15%
- CAD 49,020 - CAD 98,040 (US$77,880): 20.5%
- CAD 98,040 - CAD 151,978 (US$120,730): 26.5%
- CAD 151,978 - CAD 216,511 (US$171,995): 29.0%
- CAD 216,511 and above: 33.0%
Married couples file separate tax returns.
The above rates also apply to non-residents’ Canadian-sourced income, except where profits arise from dividends, royalties and rents which are taxed at a flat rate of 25%.
Canada Individual Tax Rules
Canadian citizens are taxed on their worldwide income wherever earned or paid
- Non-residents are liable for taxes on their Canadian-earned employment income, business income in addition to gains from selling Canadian property. Non-residents are taxed at 25% on income from royalties, rents, or dividends
- The tax year runs from January 1 until December 31
- Self-assessment tax returns are due by April 30 of the following year, or by June 15 for filing self-employed income, by both residents and non-residents, but any due taxes must be paid by April 30 of the following year
- Married couples file independent returns
- Individuals living in Canada for 183 days or more are considered as tax residents. They may be liable for taxes for the entire year that includes the 183-day qualifying period
- Liability for taxes as a resident is decided on an individual basis on criteria applied by the Canada Revenue Agency
- Taxable payment includes salaries, wages, tips, bonuses, fees, profit sharing
The federal Goods and Services Tax (GST) and Harmonized Sales Tax (HST) apply to most goods and services at 5%. Rates vary between provinces, for example HST is 13% in Ontario and 15% in four others. Some provinces also apply a Provincial Sales Tax (PST). Exemptions include groceries and health services, among others.
Canada Employers’ Social Security and Statutory Costs
Employer Social Insurance Taxes:
All Canadian employers must pay into the Employment Insurance (EI) fund, which supplies income for workers who lose their jobs, and into the Canada Pension Plan (CPP). Québec has its own pension plan, the QPP.
Employer percentage EI contributions of the employees’ salaries are 2.212% to a maximum of CAD 1,245.36 (US$989) in 2021 and CAD 1,333.84 (US$1,058) in 2022. Employers also pay 5.25% into the CPP fund with the maximum pension contributions capped at CAD 55,900 (US$44,406).
Employee Social Insurance Taxes:
All Canadian employees pay into the Employment Insurance (EI) fund and the Canada Pension Plan (CPP).
Employees contribute percentages of their salary into both funds – 1.58% into the EI and 5.25% into the CPP. EI contributions are to a maximum of CAD 889.54 (US$706) and to a maximum of CAD 55,900 (US$44,406) in the CPP. Québec runs its own pension plan.
Other statutory employer costs include the National Minimum Wage.
On December 29, 2021, Canada introduced a new Federal Minimum Wage affecting all private sector federally regulated employees of CAD 15 (US$11.92), regardless which province or territory they work in.
This is the lowest hourly rate which can be paid, although if the province mandates for more than CAD 15, the higher rate applies. For those workers not covered as federally regulated private sector employees, the minimum wage will still be set according to which of the 10 provinces or three territories they work.
For example, as of October 2021, rates included Alberta CAD 15 (US$11.92), Newfoundland and Labrador CAD 12.50 (US$9.93), Northwest Territories CAD 13.46 (US$10.69) and Nunavut CAD 16.00 (US$12.71)
Canada Corporate Taxes
- Corporate Income Tax (CIT): The federal rate is 15%, but provinces also apply corporation taxes. These range from 8% in Alberta up to 14% in New Brunswick, 15% in Newfoundland & Labrador and 16% for Prince Edward Island.
Under the small business deduction scheme, Canadian-controlled private corporations have reduced rates of CIT up to a limit of CAD 500,000 (US$405,050) on ‘active business income’, but this concession reduces when taxable income reaches CAD 10,000,000 (US$8,100,120).
The concession is removed at CAD 15,000,000 (US$12,150,176)
- Withholding Tax (WHT): A rate of 25% (depending on any tax treaties) applies to non-residents’ income from such as dividends, royalties and rent
- Capital Gains Tax: The rate is 50% of the capital gain
Corporate Deductions and Capital Allowances
The Canada Revenue Agency (CRA) allows deductible expenses include accounting, insurance and legal fees, advertising expenditure, business taxes, licenses and fees, interest and bank charges, maintenance and repairs, salaries and employers’ contributions, start-up costs and motor vehicle expenses.
Annual permitted Capital Cost Allowance (CCA) for tax purposes groups qualifying categories into furniture and fittings (20%), automotive equipment (30%) and buildings (4%-10%).
Avoid risks – make the right move
Canada’s tax regulations demand expert advice for incoming foreign companies. Businesses cannot risk stumbling into mistakes over payroll and taxation, with the chance of fines and sanctions. Do not waste time worrying about your move into Canada – contact us today.