In this article, you will learn about Income Tax, Capital Gains Tax, and Sales Tax. This knowledge will help you understand your business and its financial picture. If you are planning to open a business, it is important to understand the tax implications involved in your endeavors. In Canada, taxes are one of the most important aspects of a business.
Taxes on income
In Canada, there are different kinds of taxes. For example, income tax on self-employment is separate from income tax on pensions. Income from pensions may come from several sources, including the Canada Pension Plan, the Quebec Pension Plan, or Old Age Security. In any case, you will need to provide documentation to support the amount you received.
The federal government collects tax dollars from citizens to provide a variety of services and programs. Tax dollars help governments provide free health care, education, infrastructure, and other social benefits. In 2013-14, the federal government spent $251.2 billion on government-sponsored programs. These programs make a significant impact on people’s lives.
Personal income tax is collected by the Canada Revenue Agency (CRA). It then remits the revenues to the provinces and territories. The provinces and territories have separate tax forms. For the federal income tax, a taxpayer should complete a federal income tax return. However, if an individual has income in several provinces, he or she should complete a provincial/territorial tax return. The CRA website will provide detailed information about provincial and territorial tax rates.
Canadian tax rates are based on the amount of income you earn each year. Higher income earners pay higher taxes. People in the lower income brackets pay lower rates. Income tax brackets are based on the amount of income you earn minus the amount you can deduct and claim exemptions.
In addition to income taxes, provincial and territorial governments levy consumption taxes. In Ontario, the HST is 13%, with 5% going to the federal government and 8% to the province. In British Columbia, sales receipts will show a separate GST and PST amount. In Alberta, there is no PST so you will pay only 5% GST.
Taxes on capital
Capital gains are income you generate when you sell a capital asset. Unlike dividends, capital gains are not taxed on a consistent basis. Rather, they are taxed on the difference between the price you paid and the amount you actually earned. In most cases, you will be taxed on capital gains only if you sell the asset for more than you originally paid for it.
The federal government offers several tax benefits to Canadians who own or invest in stocks and mutual funds. Dividends, earned from investing in certain companies, are generally tax-free. However, interest is taxed at the highest marginal rate. This makes interest income the least efficient form of investment income. Dividend income, on the other hand, is tax-efficient because it benefits from the federal dividend tax credit.
A partnership that holds Canadian securities can elect to treat the investment as capital property. The election must be made by one of the partners, and will not affect the other partners. An election is made by filing a form called Form T123. This form has to be attached to the partnership’s 2021 income tax return. Once filed, the election cannot be reversed.
Taxes on sales
In Canada, taxes on sales vary from province to province. The federal government applies GST, or the goods and services tax, to most purchases, while each province has its own sales tax. These taxes apply to most goods and services in most provinces, but some provinces, like British Columbia, have combined both GST and PST into one tax.
In addition to the GST, other taxes on sales are imposed by the federal, provincial, and territorial governments. Generally, the federal government imposes the GST on most sales of goods and services, including electronic commerce. However, some goods and services are exempt from GST, such as basic groceries.
Businesses must register for GST/HST if they make sales in Canada. The thresholds are different for different categories. For GST/HST purposes, businesses with less than $30k in worldwide revenue are considered small suppliers. There are separate thresholds for charities. The threshold calculation includes revenue from certain affiliates but excludes sales of capital assets, business goodwill, and financial services.
While the federal Goods and Services Tax (GST) applies to all transactions in Canada, basic food items are exempt. Provincial sales taxes vary from province to province, and tips are not included in the price. The Canadian custom is to leave a gratuity of 15% of the total bill (before taxes), either on the table or directly to the waiter.
Generally, non-residents that plan to run a services business in Canada will incorporate a subsidiary. If the Canadian entity is not a permanent establishment, non-residents can obtain exemptions from the Canadian income tax.
Taxes on dividends
Dividends earned in Canada are subject to taxes depending on the province and the type of dividends. There are three main tax rates that apply to dividends, and the amount you pay is determined by your personal circumstances. For example, if you are single and do not have other income, you may be able to receive tax-free dividends.
As a Canadian resident, you may be able to claim a tax deduction for your stock option benefits. However, to qualify for the deduction, the shares must have a fair market value on the grant date. This deduction applies only to a portion of your income. If you have received more than CAD 500 million from a Canadian corporation, you may qualify for a higher deduction.
In addition, you must pay personal taxes. In Canada, you are subject to both federal and provincial income tax. Personal tax instalments are due each quarter on the 15th of the month. If you do not pay the tax on time, you will be penalized with a late remittance penalty.
Dividends that are received by a non-resident corporation are subject to the non-resident dividend tax. These payments are taxed under the non-resident corporation’s paid-up capital. However, these payments are not subject to WHT if they are fully collateralized.