Tax in Canada

Canadian income tax liability is determined by an individual’s residence status. An individual resident in Canada is taxable on worldwide income. Non-residents are taxed on Canadian-source income only.

The tax statutes do not contain a specific definition of “residence.” Accordingly, the residence of an individual is determined by such matters as the location of the following:

• Dwelling places
• Spouse
• Dependants
• Personal property
• Economic interests
• Social ties

However, a non-resident individual who stays temporarily in Canada for 183 days or longer in a calendar year is deemed to be a resident of Canada for the entire year, unless they are determined to have non-resident status under a tax treaty. This provision applies only to an individual who would otherwise be considered a non-resident. They don't apply to an individual who purposely takes up residence in Canada or to an existing resident who is no longer resident after moving away from Canada. These individuals may be treated as part-year residents.

In the year an individual becomes a Canadian resident, that individual is considered a part-year resident. They are subject to tax in Canada on worldwide income for the portion of the year they are resident in Canada. A part-year resident is also subject to Canadian tax on any Canadian-source income received during the non-residence period.

Employment income – Income from employment includes salaries, wages, directors’ fees and most benefits received from employment. Some examples of taxable benefits are low-interest loans, the use of company-owned automobiles, subsidised or free personal living expenses and stock option benefits. Among the few non-taxable benefits are employers’ contributions to certain employer-sponsored retirement savings plans, including registered Canadian pension plans and deferred profit-sharing plans.

Self-employment income - An individual’s income from a business or property is generally determined using the accrual method of accounting.

Income derived from a partnership is allocated among the partners according to the partnership agreement or, in the absence of an agreement, the governing partnership law. Deductions and credits also flow through to the individual partners. Special rules limit the amount of business or property losses that may be claimed by a limited partner of a limited partnership.

In general, business losses not utilised in the year incurred may be deducted from taxable income earned in the 3 years preceding the year of loss or in the 20 years following the year of loss.

Directors’ fees - Directors’ fees derived from Canada or a foreign country are taxed as employment income to a Canadian resident. Tax treaties signed by Canada generally don't allow Canadian residents to be exempt from tax on directors’ fees received from a foreign (non-resident) company, or to otherwise receive favourable tax treatment.

For non-residents, directors’ fees are considered to be earned where the services of the director are rendered. So any fees for services rendered at a specific board meeting in Canada are taxable in Canada. If a fee is related to services rendered both in and outside Canada, it may be possible to prorate the fee in proportion to the number of days that the director spent in Canada during the year. However, no specific guidelines for such allocations are provided.

Under certain tax treaties, directors’ fees are considered similar to compensation from regular employment. If the conditions exempting a non-resident from Canadian taxes on compensation from regular employment are met, the directors’ fees are exempt.

Investment income - Interest income may be reported by an individual using the cash basis (when received), the receivable basis (when due) or the accrual basis (as earned during the year) on investments if the investment is held for less than 12 months. Whichever method is selected, it must be applied to an investment consistently. However, for most investments held for a period of more than 12 months, accrued interest must be included in income annually. The bonus or premium paid on the maturity of certain investments, such as treasury bills, strip bonds or other discounted obligations, must be reported as interest income.

Dividends received by individuals resident in Canada from taxable Canadian corporations are given special treatment to recognise corporate taxes already paid on the accumulated income used as the source for the dividend distribution. These dividends are classified as “eligible dividends” or “ineligible dividends.”

An “eligible dividend” is a taxable dividend paid to a person resident in Canada by a corporation resident in Canada and designated by the corporation at the time of payment to be an “eligible dividend.”

Royalties and rental income are taxed as ordinary income. In computing a loss from the rental of real estate or leasing of other property, allowable depreciation generally is limited to the net income determined before deducting depreciation. Therefore, the depreciation claimed by an individual may not create or increase a rental loss.

All residents of Canada, age 18 or older, may contribute up to CAD7,000 to a tax-free savings account (TFSA) from 2024. No tax deduction is allowed for the contributions, but the investment earnings are not subject to tax.

Non-residents with sources of income from Canada other than employment or business income generally are subject to a withholding tax of 25% of gross income received. Examples of income subject to withholding tax are rental income, royalties, dividends, trust income, and pensions. The payer must withhold and remit the appropriate amount of tax and must file the required returns. For the recipient, withholding taxes generally are final taxes, and tax returns are not required for income subject to withholding. However, non-residents receiving real estate rentals or timber royalties may choose to file a tax return and be taxed in Canada on the net rental or timber royalty income at the same tax rates that apply to Canadian residents. Non-residents receiving certain pension and benefit income may elect to be taxed on such income at the same incremental tax rates as Canadian residents, rather than at the withholding tax rate.

Most arms’ length interest payments to non-residents are exempt from Canadian withholding tax.

Canada’s double tax treaties generally reduce withholding taxes to 15% or less on most types of passive income paid to non-residents.

Other sources of income - Other amounts that must be included in income are receipts from superannuation or pension plans and amounts paid from Canadian Registered Retirement Savings Plans. Eligible pension income can be split between spouses for tax reporting purposes. Under this measure, if spouses have taxable income in different income tax brackets, overall tax may be reduced by moving income from the higher rate taxpayer to the lower rate taxpayer.

Taxation of employer-provided stock options - Individuals are not taxed when the employer grants the stock options. In general, tax consequences arise when the employee exercises the options.

The amount of the taxable benefit is equal to the difference between the value of the shares at the time the shares are acquired and the exercise price paid. The shares have a cost basis equal to the fair market value of the shares at the time of acquisition, provided the employee does not hold identical shares of the issuer at that time. The employee may be entitled to a deduction equal to 50% of the taxable benefit (25% for Quebec tax and 50% if the public corporation has a significant presence in Quebec) if the option price is at least equal to the fair market value of the shares on the date of grant, if the shares are prescribed shares and if certain other conditions are met.

Effective 25 June 2024, the stock option deduction is reduced to one-third of the stock option benefit. However, individuals may claim an increased deduction of 50% of the stock option benefit up to a combined annual limit of CAD250,000 for both employee stock options and capital gains. The effect of this deduction is taxation of the benefit at tax rates applicable to taxable capital gains.. For stock options granted after 1 July 2021, the 50% stock option deduction is limited to an annual cap of CAD200,000 at the time of grant, based on the fair market value of the underlying shares except in the case of options granted by Canadian-controlled private companies (CCPC) and non-CCPCs whose gross revenues, or whose corporate group gross revenues, if applicable, are CAD500 million or less.

The Canadian stock option rules apply to both shares and to units of mutual fund trusts.

If the employee is a resident of Canada at the time that the shares are sold, any gain is subject to the regular capital gains rules. If the employee ceases to be a Canadian resident prior to the sale of the shares, then they are subject to the deemed disposition rules at departure.

Fifty percent of the year’s capital gains are included in taxable income, to the extent that the amount exceeds 50% of capital losses for the year. Effective 25 June 2024, the capital gains inclusion rate for individuals is increased to two-thirds for gains realised that exceed an annual limit of CAD250,000. Quebec has proposed to increase the capital gains inclusion rate on the same basis as the federal change. This includes capital gains on real estate and personal property, regardless of whether used in a trade or business, and on shares held for personal investment. Special rules apply to determine the nature of the gain or loss on the sale of depreciable property.

The adjusted cost basis of identical shares must be averaged for the purpose of determining the capital gain or loss on a disposition of such shares if the individual has acquired shares of a particular corporation at different dates.

Capital gains derived from the sale of a principal residence are generally exempt from tax. Capital losses incurred on the sale of a principal residence may not be used to reduce income for the year. In general, capital losses from personal-use assets are not allowed.

Capital losses - Except for allowable business investment losses and capital losses realised in the year of death, capital losses not utilised in the year realised are deductible only against net capital gains realised in another year. Unused capital losses may be carried back to any of the three preceding years or may be carried forward indefinitely.

Ceasing Canadian residency - An individual who ceases Canadian residency is generally deemed to have disposed of all assets, including taxable Canadian property, and excluding real property located in Canada, capital property or inventory used in carrying on a business in Canada, certain pension rights and unexercised employee stock options, at fair market value on the date that residency is terminated. The deemed disposition rule is commonly referred to as “departure tax.”

The following special tax rules and exceptions apply to individuals entering or leaving Canada with respect to the calculation of capital gains or losses and the general deemed disposition rule:

• The departure tax provision is modified for an individual who was not resident in Canada for more than 60 months during the 120-month period preceding departure. Property owned by such an individual when they became resident, or property inherited since that time, is not subject to the deemed disposition rule
• Non-residents who return to Canada after emigrating may elect to reverse the tax effects of the deemed dispositions of the assets that are still held regardless of how long they were non-residents
• Emigrating taxpayers who are subject to the deemed disposition rules may post security for the departure tax instead of paying such tax by the balance-due date for the year of departure. An individual is not required to provide security for an amount of departure tax that is equal to or less than the taxes payable on the first CAD100,000 of capital gains resulting from the deemed dispositions

Canadian succession law does not include estate or gift tax. However, provincial probate fees may apply at rates that vary depending on the province.

The provinces of British Columbia and Ontario have implemented foreign home buyer’s taxes that apply to non-Canadian citizens and non-permanent residents of Canada. The tax is levied on the value of the property being acquired at a rate of 20% in British Colombia and 25% in Ontario. In British Columbia, a Speculation and Vacancy Tax has also been implemented for certain properties located in certain urban centres.

For Canadian citizens or permanent residents of Canada who are not members of a satellite family, the tax rate is 0.5% of the property’s assessed value. The tax rate for foreign owners and satellite families is 2% of the property’s assessed value. A satellite family is defined as persons who declare less than 50% of their total combined household income for the year on a Canadian income tax return. This could apply even if an individual is a Canadian citizen or British Colombia resident. Certain exemptions exist.

Contributions - Individuals employed in Canada and their employers must each make Canada Pension Plan (CPP) contributions at a rate of 5.95% on salaries, which includes 1% enhanced CPP contribution. Contributions to the Quebec Pension Plan, where applicable, are made at a rate of 6.4%. For 2024, the maximum amount of earnings subject to CPP contributions is CAD68,500, with a basic exemption of CAD3,500. This results in a maximum annual CPP contribution for employers and employees of CAD3,867.50 each. Self-employed individuals must pay both portions for a maximum annual contribution of CAD7,735.00. Quebec Pension Plan contributions are subject to the same thresholds, resulting in maximum employers’ and employees’ contributions of CAD4,160 and self-employed individuals’ contributions of CAD8,320. If the employment income exceeds CAD68,500, the employee and employer must contribute to the additional plan under the Quebec Pension Plan at a rate of 4% on the earnings between CAD69,400 and CAD73,200. Self-employed individuals are required to contribute to the additional plan under the Quebec Pension Plan at a rate of 8%.

Employment insurance premiums are also payable. For 2024, an employee’s required employment insurance premiums are calculated at a rate of 1.66% on the maximum annual amount of insurable earnings of CAD63,200. This results in a maximum annual premium of CAD1,049.12. Employers must make contributions equal to 1.4 times the amount of the employee’s premiums, up to CAD1,468.77. The federal employment insurance premiums for Quebec residents are lower. The premium rates are 1.32% for employees and 1.848% for employers. Quebec has lower rates because Quebec residents also participate in the Quebec parental insurance plan. For 2024, an employee’s required premiums under the Quebec plan are calculated at a rate of 0.494% on the maximum annual amount of insurable earnings of CAD94,000. This results in a maximum annual premium of CAD464.36 for the Quebec parental insurance plan. Employers must make contributions equal to 1.4 times the amount of the employee’s premiums, up to a maximum of CAD650.48.

Canadian resident individuals or employers may have to contribute to health care plans operated by the provinces. Most hospital bills and physicians’ fees, including those for drugs and dental care in some provinces, are covered by these plans.

The federal government, as well as the provinces and territories, impose income taxes on resident individuals. However, only the province of Quebec collects its own individual income tax and requires filing a separate return. The federal government collects the tax on behalf of all other provinces and territories, which means that only one combined return must be filed.

Income tax is generally paid to one of the provinces or territories based on the individual’s residency on the last day of the year. All of the provinces and territories calculate tax by applying their graduated tax rates to taxable income. A separate calculation of taxable income, which is similar to the calculation of federal taxable income, is required. However, the treatment of certain items may differ.

Individuals must file tax returns if they owe tax or if they are specifically requested to do so by the tax authorities. In addition, because of the capital gains exemption rules all individuals with capital gains or losses must file income tax returns, regardless of whether tax is owed for the year.

Non-resident individuals generally must file Canadian income tax returns if they earn employment or business income in Canada or if they have capital gains from dispositions of “taxable Canadian property” (TCP), which includes the following:

• Real estate in Canada
• Property used in carrying on a business in Canada
• Shares of a Canadian resident or non-resident corporation not listed on a designated stock exchange, capital interests in trusts, income interests in non-resident trusts (other than units of mutual fund trusts) or interests in partnerships, if at any time during the 60-month period before the disposition, more than 50% of the fair market value of these shares or interests was derived directly or indirectly from real or immovable property located in Canada, Canadian resource property, timber resource property or options on or interests in any of these properties (or from any combination of these properties)
• Shares of a Canadian resident or non-resident corporation listed on a designated stock exchange, shares of mutual fund trust corporations or units of mutual fund trusts, if at any time during the 60-month period before the disposition, 25% or more of the issued shares of the corporation or units of the mutual fund trust was owned by non-resident and related parties and more than 50% of the fair market value of the shares or units of the mutual fund trust was derived directly or indirectly from real or immovable property located in Canada, Canadian resource property, timber resource property or options on or interests in any of these properties (or from any combination of these properties)
• Income interests in trusts resident in Canada

Canada’s double tax treaties may modify or exempt non-residents from the above tax provisions. However, in general, Canadian non-resident tax withholding is required unless a payroll waiver is obtained or unless the employer becomes certified under a new certification process implemented in 2016.

Any unpaid income taxes are due on or before 30 April of the year following the tax year, regardless of the due date of the individual’s return. Penalties are levied if any tax due is not paid on time, and interest is charged on unpaid taxes.

Individuals may be required to make quarterly instalment payments if the difference between tax payable and the amount withheld at source is greater than CAD3,000 (for Quebec residents, CAD1,800 of federal tax payable after federal withholding) in both the current year and either of the two preceding years.

Taxpayers coming to or departing from Canada during a tax year are taxed on their worldwide income for the portion of the year in which they are residents of Canada.

Foreign tax relief - Foreign taxes paid are generally allowed as credits. If an individual receives foreign-source income that has been subject to foreign tax, foreign tax credit relief may be provided in Canada to reduce the effects of double taxation. The foreign tax credit is computed on a country-by-country basis and may be taken only to the extent of Canadian tax payable on the net foreign income from the country.

Provincial foreign tax credit relief for non-business foreign income taxes is also provided. The provincial tax credit is generally limited to the lesser of the provincial taxes payable on the income and any foreign tax paid exceeding the amount of tax allowed as a credit and deduction for federal income tax purposes.

Double tax treaties - Canada has negotiated double tax treaties with most major industrialised nations and many developing nations. All treaties negotiated after 1971 generally follow the provisions of the model treaty developed by the Organisation for Economic Cooperation and Development (OECD). Many treaties currently in force were negotiated prior to 1972 and may vary significantly from the OECD model treaty.

Double tax treaties have been entered into with 94 countries. 3 other treaties have been signed, but are not yet in force.