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Taxation in Canada

Taxable Income and Rates

The personal tax burden on Canadians is among the highest in countries that are members of the OECD, despite reductions in recent years. Personal taxes account for three times as much federal government revenue as corporate taxes – an estimated C$87 bn for fiscal 2004-05. Besides federal and provincial income taxes, Canadians pay consumption taxes to the federal government on most purchases (the 7% goods and services tax, the GST) and to all provinces (the provincial sales tax, the PST), except Alberta.

High income tax rates in Canada are mainly the result of a large social-support system, including government-paid healthcare and lower-cost university education. Recent budgets from Canadian federal and provincial governments have reduced taxes and increased disposable income.

In 2001 the federal government promised to reduce personal income taxes by C$100bn by 2004. It stated that a two-income family of four with total earnings of C$100,000 would save C$2,666 in taxes (or 17%) at the end of the three years. During the same period, personal tax rates were also lowered in most provinces, with low- and medium-income earners the main beneficiaries. In Ontario the combined federal-provincial tax rate on C$30,000 of annual income dropped from about 28% in 2002 to 25% in 2004.

However, tax levels differ significantly among provincial jurisdictions. In Alberta, with a single provincial tax rate of 10%, the combined tax rate for 2004 on personal income of C$35,000-70,000 is 32% and the maximum rate for income over C$113,000 is 39%. In Ontario combined taxes on C$35,000-70,000 of income range from 33% to 39%, and the rate on income over C$113,000 is 46.4%. The highest combined rates for 2004 (on income over C$113,000) are in Newfoundland and Labrador (48.6%) and Quebec (48.2%).

Foreign business personnel do not receive any special tax considerations, and US citizens who work in Canada must usually file tax returns in both Canada and the US. Application of the Canada-United States Tax Convention can reduce the overall tax burden. Transferees qualify for Canadian medical benefits. To counter higher Canadian tax rates, foreign parent companies often use some sort of tax-equalisation plan.

Following reductions in federal and provincial tax rates, indexing for inflation and the near-elimination of surtaxes, many Canadians have more disposable income today than a few years ago. The top marginal rate for federal taxes was lowered from 31% in 1999 to 29% for 2001 where it has remained into 2005. In Ontario the combined federal-provincial top marginal rates have dropped from just under 49% in 1999 to 46.4% in 2005. In Alberta, with the lowest top marginal rates of all the provinces, the decline in the combined top rate is most evident – from 45.6% in 1999 to 39% in 2001-05.

Tax rates for 2005 remain much as they were in the previous three years. No federal tax is payable on income under C$8,148. Federal tax payable on income from C$8,149 to C$35,595 is 16% (basic rates were not changed, but all dollar amounts rose from 2004 levels to reflect inflation). Tax on the next bracket, C$35,595 to 71,190 is 22%, and on the next, C$71,190 to 115,739 is 26%. The rate on income exceeding C$115,739 is 29%. The indexation of tax rates was restored in the 2000 budget, so Canadians are no longer being nudged into higher tax brackets with inflation-related pay increases.

Several provinces have lowered personal tax rates more dramatically. No taxes are payable on income ranging up to C$6,365 in Quebec and C$14,523 in Alberta. The latter province, the friendliest tax jurisdiction, lowered its single personal tax rate by a half point to 10% in 2001, where it has since remained. British Columbia, Alberta’s neighbour to the west, was a high-tax province, but the government that was elected in 2001 reduced personal taxes by 25% and introduced five tax brackets (compared with three or four in most other provinces). British Columbia taxes individuals at a 6.05% rate on income of C$8,676-33,061, at 9.15% on C$33,062-66,123, at 11.7% on C$66,124-75,917, at 13.7% on C$75,918-92,185 and at 14.7% on amounts above C$92,185.

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