Governments cannot operate without money. To ensure they have a ready supply of it, they typically collect taxes from their citizens. Taxes can be levied on goods and services purchased, property owned and income earned. Income tax is the Canadian government’s largest source of revenue, and it’s important to understand how it works.

Why Do We Pay Income Tax?

  • The Canada Revenue Agency requires anyone who owes tax to file an income tax return.
  • The CRA generally requires individuals who have earned more than $3,500 in employment or self-employment income to file a tax return.
  • The CRA also requires individuals with capital gains to file a return.

Not everyone who files a return actually pays income tax.

In some cases, if a tax filer has very low income, the CRA doesn’t collect tax from them. Instead, it simply offers them benefits and financial help based on the information on their returns.

What Is the Money From Taxes Used For?

The federal government uses income tax to fund a range of services and projects.

It uses it for everything, from health care to infrastructure projects such as roads and bridges, to paying for the military, to covering the pay cheques of politicians or civilian servants.

In addition, provinces and territories also collect income tax return. The amount they collect varies, as they also set different income tax rates, but they also use the money for the public good.

Collecting Income Tax

Income tax is collected in a range of ways. If you are an employee, your employer is required by law to deduct Canada Pension Plan contributions, Employment Insurance premiums and income tax from your pay cheque, and they are required to remit those funds to the CRA.

In most cases, you are required to submit an income tax return at the end of the year. When filling out that form, you note all of your income as well as your deductions and information about credits for which you may qualify. The CRA then crunches the numbers to determine if you owe additional income tax or if you are entitled to a refund.

In many cases, to avoid a large tax bill at the end of the year, taxpayers send installments to the CRA. These quarterly payments are often made by self-employed individuals, small business owners and other individuals who anticipate that the may owe money at tax time.

Establishing Income Taxes

In most cases, the more an individual earns, the more income tax they must pay.

The Canadian government also tries to make the system as fair as possible by offering its taxpayers a number of credits and deductions. For example, if you have a child with a severe and prolonged mental or physical disability, the CRA recognizes that taking care of that child is likely to be significantly more expensive than taking care of a child without a disability. As a result, the CRA allows you to apply for a special deductions and tax credits. These benefits help to even the playing field for all taxpayers.

References & Resources