Taxes in Canada
Each level of government (municipal, provincial, and federal) provides a variety of services, which are offered with no upfront cost to its citizens. This includes everything from education and healthcare, to road maintenance and garbage pickup. None of these services are really “free” – they are paid for by the taxes that each Canadian pays.
Canada is often seen as having a high tax percentage. And it’s true that the average Canadian pays 42.5% of their income towards tax. However factors like what income level you are, how much you are investing, or whether you have children, can drastically change the amount of tax you pay.
We have outlined how taxes work in Canada to give you an understanding of what gets paid to each level of government, and how that money is collected.
Federal & Provincial Income Taxes
Payroll taxes, or income taxes, are deducted directly from your paycheck by your employer. They include a federal and provincial tax, as well as your contribution to programs like Employment Insurance and the Canadian Pension Plan.
Each province has its own tax rate, built on a sliding scale, which increases the more money you make. For example in Nova Scotia, you will only pay 8.79% income tax on $29,590, but you will pay 14.95% on the next $29,590, and 16.67% on the next $33,820.
The amount of tax that is taken off of your paycheck can be greatly altered by situations whether you or your children are enrolled in post-secondary education, whether you invest into a pension or retirement fund, or whether you have any dependents.
It is worth noting that while your employer is responsible for deductions, you as the taxpayer are responsible for filing your tax return at the end of the year, and reconciling what you have paid. If you have overpaid in tax, you will be entitled to a refund, while if you underpaid the government will collect.
After you have paid tax on the money you earn, you must also pay taxes when you spend it. Each province has its own sales tax rate. Note that some items, such as basic groceries, may have reduced or 0 tax rates.
GST (Good and Services Tax)
GST is a Canada-wide income tax, which may be a flat 5%, or included in a province’s HST.
PST (Provincial Sales Tax)
PST is the amount collected by the province. Each province has their own tax number.
HST (Harmonized Sales Tax)
HST combines the provincial PST and federal GST sales taxes into one number. You will find HST in Ontario, Nova Scotia, New Brunswick, PEI, and Newfoundland & Labrador.
Wealth and Inheritance Taxes
Canada is one of the few countries, and the only G7 country, that does not have an inheritance tax. Upon death, a final tax return is completed, and any assets that you currently have will be taxed at fair market value. Note that your principal residence is not taxed. Provinces may have probate taxes, some of which may be avoidable if your estate is set up correctly in advance by a lawyer. Your heirs will not be required to pay tax on the inheritance money they receive from your estate, and any monetary gifts you give are not taxed.
Canada also does not have a wealth tax, or a 1% tax. While you do pay higher taxes the higher your income is, you are not penalized for holding a large portion of wealth and assets the way you would be in France, Portugal, or Spain.
You will also pay property tax, which is paid by the home owner yearly to the local government. Renters pay this as part of their rent.