Are you looking for a tax law guide in Canada?

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The provincial tax systems are generally integrated with the Federal tax systems. This means when you file your taxes federally, you’re also filing your provincial return. The federal taxation guidelines are set out in the Income Tax Act, whereas each province has similar (but distinct) taxes and tax benefits.

For this reason, applicable tax varies by location and is primarily influenced by your sources of income, assets, and provincial tax rules.

Tax Law Guide – Personal Tax

Canadians, residents (more than 183 days/year) and Canadian businesses can expect to be taxed on both income and certain assets such as real estate and equities (stocks, options, or shares in a business). Non-residents are similarly taxed on income generated in Canada and any gains realized from assets owned or sold in Canada.

Your quantity and source(s) of income also determine your applicable tax rate (often referred to as marginal tax). A salary under CDN $50,000 might only be taxed at 15%, whereas income above this amount is taxed proportionally higher up to a maximum of 33% on amounts above CDN $216,000.

A common misconception is that your marginal tax rate is applied to all income equally. Instead, tax is applied on a graduated basis, such that income from $0-$49,000 is taxed at 15%, income from $49,000-$98,000 is taxed at $20.5%, and so on.

On death, individuals are responsible for tax on income and capital gains (increase in the value of assets), and may additionally be subject to a Probate tax on their estate (province-dependent).

Corporate Tax

Applicable tax on corporations is treated somewhat differently than personal income and is influenced by the level of foreign ownership, as well as the level of income generated by the corporation.

For example, a Canadian-controlled private corporation (CCPC) generating less than $500,000 is taxed at 11%, but the same corporation with substantially foreign ownership is taxed at approximately 26% (depending on the province/territory).

Corporations earning over CDN $500,000 are categorized as a “generally active business” requiring a different tax treatment ranging from 23% in Alberta to 27% in British Columbia.

In some provinces such as Ontario, a “Corporate Minimum Tax” of just under 3% may also apply to businesses with substantial assets or income over CDN $50 Million.

Conversely, corporations incurring a loss may be able to accrue these losses and deduct them from taxable income for up to 20 years.

Value Added Tax

Certain goods, services, and property in Canada are subject to a 5% federal consumer tax (GST) that is levied at the point of sale. Each province may also have a provincial sales tax (PST) that is additionally applicable to certain transactions.

PST varies from province to province ranging from 0% in Alberta to over 9% in Quebec (QST). In some cases, such as Ontario or Nova Scotia, GST and PST are blended into a harmonized sales tax (HST) inclusive of both the federal and provincial levy.

Combined GST/PST or HST varies based on the category of product, and certain categories such as legal aid, certain types of education, and non-new real estate may be exempt from applicable GST/PST/HST.

In general, most businesses in Canada that earn over CDN $30,000 per year are required to register to collect and remit GST/PST/HST on their products and services as prescribed by the Canada Revenue Agency (CRA).

Stock Tax

Purchasing equities (stock, mutual funds, index funds etc.) can be an excellent way to diversify your investments, however, it’s important to note that any gain in the value of such equities is taxable on sale. When a stock is sold, the difference between the purchase price and the sale price is called a capital gain.

For example, let’s say you bought some shares of Apple in 2020 for $1000 and today those shares sold at a value of $1500, your taxable gain would be $500. Unlike regular income, capital gains are subject to a unique tax treatment such that only 50% of any gains are taxable.

That is, on a gain of $500, tax would be owing on only $250. The specific amount of tax applicable on this amount is contingent on the aforementioned marginal tax rate.

For instance, someone earning less than CDN $50,000 in the year of the taxable gain, would only pay 15% tax on $250 or $37.50, however, someone at the top marginal tax rate would pay 53.5% of $250 or $133.75.

Tax Law Guide – Stocks and Dividends

Some exceptions to the above include equities contributed to registered retirement savings plans (RRSPs) and equities distributing dividends. When a stock with an unrealized gain (i.e. stock increased in value since purchase, but has not been sold) is transferred into an RRSP, the gain is deemed to be realized and subject to capital gains tax.

For stocks that issue dividends (i.e. a proportional share of the company profit in a given period), the dividend is additionally taxable in the year of issue. Fortunately, the tax burden of dividends is shared by the issuing corporation resulting in a more favorable tax treatment on dividend income.

That said, the specific treatment depends on your income bracket and whether the dividend is categorized as “eligible” or “non-eligible”. Eligible dividends are taxed at 38%, whereas non-eligible dividends are taxed at 15%.

Calculating dividend tax can be somewhat complicated — especially when dividend tax credits are involved, which is why it’s wise to seek the assistance of a qualified tax lawyer or CPA before finalizing your taxes.

Cryptocurrency Tax

Similar to more traditional equities such as stock, Cryptocurrencies (like Bitcoin, Ethereum, etc.) are subject to tax on disposition (sale). Any gain realized on sale may either be taxed as a capital gain, or as business income depending on the nature of the investment.

As cryptocurrency is somewhat of a new asset class, the CRA test to determine what constitutes business vs. capital gain income is somewhat undefined. For this reason, we recommend consulting with a qualified tax lawyer before crystalizing any gains.

Marital Tax

Generally, Canada imposes taxes on an individual level, rather than as a family unit (with exceptions, such as the child tax benefit which is calculated based on the family income).

This means that a higher-earning spouse must pay tax at the higher tax bracket, and the taxable income cannot be transferred to the lower-earning spouse to pay less tax overall.

A considerable number of methods to split income under the Income Tax Act will result in “attribution rules” which will deem the income to be that of the higher-earning spouse and tax accordingly.

There are still methods in Canada that can be used to split income between the spouses and reduce the overall tax liability for the family. A tax lawyer can advise you on the remaining permitted income-splitting tax strategies.

For example, a Canadian tax law attorney can help set up a spousal loan tax strategy. A spousal loan would allow a taxpayer to transfer investment income that would otherwise be taxable at a higher tax rate to that of their lower-tax rate spouse.

Tax Law Guide – Offshore Investment Tax

Canada taxes residents on worldwide income. If you own offshore investments, you will need to declare any source of taxable income when filing your tax return, such as capital gains from selling an offshore investment.

You may be able to receive a tax credit for any taxes paid to the foreign country, which would reduce the Canadian tax liability. The exact amount of credit will depend on the details of the tax treaty between the two countries (if one exists). A tax lawyer can guide you to the extent a tax credit applies.

If you have not previously disclosed foreign assets, you should consider the voluntary disclosure program, which can allow you to receive leniency and avoid other penalties from the CRA. A tax lawyer can ensure the correct information is provided to the CRA, to meet the precise requirements of the voluntary disclosure program.

Death Tax

In Canada, all assets of a taxpayer are deemed to have been sold on death, which can trigger substantial capital gains. Additionally, the full amount in a retirement plan such as an RRSP or RRIF is taxable as income. However, as always with tax, there are numerous exceptions to these rules. Often a taxpayer will pay the most tax in their final year.

If there is a concern that you will have a significant tax liability on death, it is wise to speak with a tax lawyer to utilize tax planning opportunities to limit death tax. There are several methods to transfer assets to a spouse or even another family member which can defer paying tax on death.

Estate tax liability

Sometimes when dealing with an estate, the executor may discover the deceased did not file several previous years’ tax returns. It will be the responsibility of the legal representative to file not only the tax return for the year of death but also the missing tax years.

Before distributing assets to beneficiaries from the estate, a clearance certificate should be obtained from the CRA that will confirm that the estate tax liability has been paid in full. Failure to obtain a clearance certificate can result in the legal representative of the estate being personally responsible for the tax debts of the estate.

While receiving proceeds from an estate, it can also be a good time to review any tax planning arrangements going forward. As assets may be transferred to a beneficiary, there may be more tax-efficient methods to hold the assets.

Tax Law Guide – Audits

The first thing to do is to identify what type of audit you will be subjected to. The most common type is a field audit, where a CRA agent will visit the place of business or residence. Alternatively, they may conduct an office audit, which takes place in a CRA office.

During a field audit, the CRA agent will look through your financial records. It is up to the CRA agent and their supervisor in how deep they will search. They will also look around the business to see if there are any discrepancies.

Receiving expert advice from a tax lawyer will be beneficial if you are being audited. They can tell you what specific questions should or should not be answered, along with what documents you are obligated to provide to the CRA agent. They can also ensure that the CRA does not infringe on your rights as a taxpayer.

CRA Mistakes

If you think the CRA has made a mistake in assessing their tax return, there is an appeals process that can be used to get the CRA to correct their mistake. Within 90 days of receiving the notice of assessment (or other notice), you must file a notice of objection.

Although not guaranteed, there is the possibility that you can receive a one-year time extension to file the notice of objection, if, for example, the delay was a result of extraordinary circumstances beyond your control.

It is possible to file a notice of assessment without a tax lawyer, but it can be recommended especially if you are unsure of the process or the legal grounds for your case. After submitting the notice of assessment, the CRA may reassess the return and correct the mistake.

CRA Account Freezes

The CRA will only freeze an account as a last resort. This likely means that the CRA has already been sending letters demanding payment, which you may have ignored or have been unable to pay. The first thing to do is to determine why the account is frozen.

It may be possible to get the CRA to agree to a payment plan if there is tax debt that cannot be paid in full – which can remove the freeze on the account. A payment plan would allow you to repay the tax debt in more manageable regular payments over a longer period.

A tax lawyer can help you reach a payment plan arrangement with the CRA. Receiving advice from a lawyer is important if you have other assets such as a business or home.

Canadian Tax Law Guide

The CRA will generally want to see that you have exhausted all other avenues such as selling assets or seeking a bank loan before obtaining a payment plan.

To prevent an account from being frozen in the first place, you can also be proactive in obtaining a payment plan with the CRA.

Your tax situation can get complicated quickly and it’s best to seek a competent advisor to help navigate your specific tax situation. Let Clearway assist you in finding the best tax lawyer in your area. Don’t know where to start? Feel free to reach out to the Clearway team for assistance.

We hope you found this Canadian Tax Law Guide useful.

Author: David A. Robertson, Tax Law Lawyer in Canada