What Is Income Tax in Canada?

What Is Income Tax?

Income tax is the portion of your annual earnings that's paid to the government. Canada has a graduated income tax system, so your tax rate depends on how much you earn.

Woman files her income taxes using a laptop in her living room.

Income tax is a portion of your annual income that’s paid to the government each year.

Income tax is collected by the Canada Revenue Agency (CRA) and used to fund government services such as health care, public education, and the military.

Some income tax revenue is also used to provide assistance to eligible Canadians through programs for families, such as the Canada Child Benefit and the Canada PRO deposit — and seniors, such as Old Age Security and the Guaranteed Income Supplement.

How income tax works in Canada

Canadian employers typically deduct income tax from your earnings each pay period. You should be able to see these deductions on your pay stub every time you get paid.

Even though your employer’s deductions ensure you’re paying income tax, you still need to report your employment earnings and any other income you receive — including passive income, government benefits, interest/investment earnings and pension income — to the CRA by filing an annual tax return.

Your tax return allows the CRA to determine if you paid enough tax on the income you earned in the past year. If you didn’t pay enough income tax, you’ll have to submit the outstanding amount to the CRA. If you paid too much, the CRA will issue you a tax refund.

When are income taxes due?

There are two different dates to be aware of when doing your taxes, the file date and the payment date.

For most individuals, the filing date and payment date are the same every year: April 30. For years in which April 30 falls on a weekend, it’s typical for the CRA to accept tax returns that are filed or postmarked by the following Monday.

If you are self-employed you have until June 15 to file your return as these taxes are considered to be more complicated. However, the payment due date is still April 30.

Not everyone is in a rush to get their taxes done, but adhering to the CRA’s tax deadlines can save you money. There are late fee penalties for not filing on time if you have taxes owing. You will also be charged interest on any outstanding tax payments.

Federal income tax rates in Canada

Canada has what is known as a graduated tax system for individual federal income taxes.

The more money you make, the higher the rate of tax you pay. You don’t, however, pay the highest tax rate on every dollar you earn — only on the amount of income that falls within each tax bracket.

In contrast, corporations pay a flat tax rate on all income.

Federal income tax rates for 2024

15% on the first $55,867 of taxable income, plus
20.5% on the portion of taxable income from $55,867 up to $111,733, plus
26% on the portion of taxable income from $111,734 up to $173,205, plus
29% on the portion of taxable income from $173,206 up to $246,752 plus
33% on taxable income over $246,752

You’ll also need to factor in the provincial and territorial tax rates when calculating your total annual tax bill.

How to do your income taxes

If your taxes are straightforward, you can prepare your own return. You can go old school and file a paper return, or choose one of the many digital options available.

Make sure to use CRA-approved tax software that will help you input your data, calculate your taxes and file your return. These free or pay what you want tax software options include CloudTax and Wealthsimple Tax.

You can also authorize a representative or a group of representatives to do your taxes. They can be a friend or family member, or hired professionals, such as an accountant, bookkeeper, or tax-preparation service. The cost will vary depending on the preparer you use and how complicated your return is.

If you have a modest income and simple tax situation, you may also be able to use a free tax clinic. This is a volunteer-run service available to certain Canadians.

How to pay income taxes

Paying your taxes is easy and can be done through several methods:

Make an online bill payment to the CRA through your bank account.
Interac debit, Visa debit or Mastercard debit using CRA My Payment.
Schedule a pre-authorized debit payment from your bank account.
Debit card, credit card, PayPal or Interac e-transfer through a third-party service provider.
Wire transfer for non-residents who need to make a payment but no longer have a Canadian bank account.
Pay in person with cheque or debit at your financial institution.
Pay in person with cash or debit at a Canada Post location.
Pay by cheque via traditional mail.

No matter what method you choose, be sure to confirm that your payment is received. You can do this online through CRA My Account. Allow three days for online payments or up to 10 days for payments by cheque. Some of these methods also come with service fees.

Unpaid taxes will incur interest which is compounded daily. If you continue to avoid paying your taxes, the CRA can take legal action against you and even seize your assets to settle your tax debt. If you are unable to pay your taxes, get in touch with the CRA to help with payment arrangements.

Claiming any and all deductions and credits for which you’re eligible is the best way to reduce your income tax bill. Utilizing tax-deferred and tax-free accounts for your investments like an RRSP or TFSA is another option to consider.