Monday, June 8, 2015

Canadian Tax Primer 2: General Rules for Individuals

Canadian income tax is usually triggered by a specific event:  the earning of income.  Triggering events come in many different forms.  For an employee, the receipt of a paycheque triggers tax on the salary included in the paycheque.  For an investor, the sale of an investment will often trigger tax on any increase in value of the investment.

Income tax is calculated as a percentage of taxable income.  The applicable percentage depends on various factors, including the province (or territory) in which the individual resides or carries on business.

Canada is a federation consisting of a federal government (serving the whole nation), ten provincial and three territorial governments.  Each level of government imposes an income tax.  In order to determine the total amount of tax that you have to pay, you have to combine the federal income tax with the applicable provincial/territorial income tax.  As a result, the combined rate of income tax varies by province. 

For non-business income earned by an individual, the taxing province is the province of residence on the last date of the calendar year.  For business income, it is the province in which the business income is earned.  So an individual who resides in British Columbia will usually pay tax to the federal government and to the British Columbia government.  If the individual resides in Field, BC and is employed across the border at the Chateau Lake Louise, the individual will still pay income tax to BC rather than to Alberta.  If the individual decides to become an entrepreneur and starts his own unincorporated business selling ice cream to tourists walking around Lake Louise, however, he will have to pay Alberta provincial income tax on his Alberta business income (but will not pay BC provincial tax on that business income).

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.