Income tax basic concepts
Before you get ready to help others file their taxes, make sure you understand Canada’s tax system and the basic concepts of income tax.
Canada's tax system
In Canada, tax is collected by the different levels of government. Tax revenue is necessary to fund facilities, services, and social programs such as:
- Roads and bridges
- Education and schools
- Healthcare and hospitals
- Libraries, parks and playgrounds
- Employment Insurance, Old Age Security and Canada child benefit
- Social assistance
Income tax is collected on behalf of the federal, provincial, and territorial governments. The amount of income tax paid is dependent on the amount of income an individual earns from January 1 to December 31 and is calculated based on income brackets. The federal, provincial and territorial governments have different tax rates and income brackets based on a graduated tax rate system. In other words, as an individual’s income reaches higher thresholds, the income earned in the next bracket is taxed at a higher amount.
The Canada Revenue Agency’s (CRA) mission is to administer tax, benefits, and related programs and ensure compliance on behalf of governments across Canada, thereby contributing to the ongoing economic and social well-being of Canadians. The CRA is the key administrator of tax laws for the Government of Canada and most provinces and territories.
Canada's tax system is based on a self-assessment principle. This means that every taxpayer is responsible for filing their tax return each year, reporting their income from all sources from both inside and outside Canada, and calculating whether tax is owed to the CRA or if a refund will be issued to them. It is also the taxpayer’s responsibility to ensure:
- their tax returns are filed on time
- any income tax owed is paid by the filing deadline
- the information declared is accurate and complete
- the CRA is notified of any changes to their personal information
Unlike other provinces, where provincial income tax is calculated as part of the federal return, Quebec taxpayers have to file a separate provincial income tax return. For more information, refer to Revenu Québec.
An individual’s total income is their income from all sources, both inside and outside of Canada. Some common sources of income include; employment income, interest income, pension income, social assistance income and self-employment income. To find out what to report as income, see Reporting income.
In Canada, some sources of income are non-taxable and do not have to be reported on the income tax and benefit return. For example, most lottery winnings, gifts and inheritances are not taxed.
For more information, refer to amounts that are not taxed.
Deductions are amounts, such as annual union dues or child care expenses, that reduce an individual’s income and, as a result, may lower the amount of income tax that an individual has to pay.
Net income is the amount remaining once all allowable deductions have been subtracted from the total income. Net income is used to determine eligibility and calculate entitlement amounts for most federal and provincial/territorial credits and benefits.
Non-refundable tax credits
Non-refundable tax credits are amounts that an individual can claim to help reduce or eliminate their tax payable. However, if the total of these credits is more than the tax owed, there will not be a refund for the difference.
Some non-refundable tax credits are set amounts pre-determined by the CRA, such as the basic personal amount, age amount, or disability amount (for self). These amounts are adjusted annually to allow for inflation and other factors.
Some non-refundable tax credits can also be determined using the following:
- schedules from the tax return, such as tuition education and textbook amounts
- amounts reported on an information slip, such as CPP/QPP contributions or employment insurance premiums reported on a T4 slip
Most non-refundable tax credits have eligibility conditions that must be met to claim them. Consult the Federal Income Tax and Benefit Guide for more details.
Refundable tax credits
Unlike non-refundable tax credits, refundable tax credits are credits that can be paid to eligible individuals, such as the Climate action incentive. Often, these credits are issued by the federal and/or provincial government in a series of payments throughout the year. Some provinces also offer refundable tax credits related to provincial or territorial income tax.
The Income tax and benefit return is made up of multiple sections.
The first section of the tax return is where you enter an individual's personal identification information, such as:
- Their name, address and date of birth
- Their social insurance number (SIN), a confidential and personal nine-digit identification number assigned by the federal government
- Their marital status
- Information about their spouse or common-law partner (if applicable)
The marital status reported on an income tax and benefit return must reflect an individual's status as of December 31 of the tax year. It is important to correctly report an individual's marital status to ensure they receive the benefits and credits they may be entitled to receive.
The following definitions will help you determine an individual's marital status.
Married means that someone has a spouse and that they are legally married.
Common-law refers to someone who lives in a marriage-like relationship with another person but is not legally married to that person, and at least one of the following situations applies:
- the individual and their partner have lived together in a marriage-like relationship for at least 12 months in a row (including any time they were separated for less than 90 days because of a breakdown in the relationship)
- the individual has a child with their partner by birth or adoption
- the individual's partner has custody and control of the individual's child (or had custody and control immediately before the child turned 19 years of age), and the child depends entirely on the individual's common-law partner for support
Separated means an individual has been living separately and apart from their spouse or common-law partner because of a breakdown in their relationship for a period of at least 90 consecutive days. Once an individual has been separated for more than 90 days, the effective day of the separated status is the day they started living apart.
A couple who obtained a legal separation through Family Court is still considered married or common-law if they continue to reside in the same residence, and should report as such on their tax return until they no longer live together for at least 90 consecutive days. In other words, they would be considered married or living common-law until they no longer live together for at least 90 consecutive days.
In all cases where the individual says that they are separated, you should ask: "When did you and your spouse stop living together because of the breakdown in your relationship?"
If you prepare a tax return for an individual before their 90-day separation period (which includes December 31) is over, indicate a marital status of married or living common law. Once the 90 days of living separate and apart have passed, it is the individual's responsibility to inform the CRA of their change in marital status.
For example, you are preparing a return for an individual on February 28, 2022. They tell you that they separated from their spouse because of a breakdown in their relationship on December 30, 2021. Since you are preparing the tax return before the 90 days of continuous separation have passed, you enter a marital status of married on the 2021 tax return.
An individual is still considered to have a spouse or common-law partner if they were separated involuntarily. An involuntary separation could happen when one spouse or common-law partner is away for work, school, health reasons or is incarcerated.
Widowed refers to someone whose spouse or common-law partner is deceased and has not entered into a new union.
Divorced refers to someone who is legally divorced, living separate and apart from their ex-partner, and is not in a new union.
Single should be chosen when none of the other marital status options apply
Individuals must update their new marital status by the end of the month following their marital status change. For more information, see Update your CRA information: Change your marital status.
Understanding how the tax return is calculated
To give you a better understanding of how taxes are calculated, we have condensed the following sections into four steps:
Calculation of step 1:
Total income (line 15000), page 3 of the tax return, lines: 10000’s
Subtracted by Deductions, page 4 of the tax return, lines: 20000’s
Equals Net income (line 23600), used to calculate some credits and benefits
Calculation of step 2:
Net income (line 23600)
Subtracted by Deductions, page 5 of the tax return, lines: 20000’s
Equals Taxable income (line 26000), used to calculate tax payable
Calculation of step 3:
Taxable income (line 26000)
Multiplied by 15% (first federal tax bracket)
Subtracted by Non-refundable tax credits (line 35000), pages 5 and 6 of the tax return, lines: 30000’s
Equals Total payable (line 43500), page 7 of the tax return
Calculation of step 4:
Total payable (line 43500)
Subtracted by Total income tax deducted (line 43700), page 8 of the tax return
Subtracted by Refundable tax credits, page 8 of the tax return, lines: 40000’s
Equals a Refund (line 48400) or Balance owing (line 48500) or nil
Once you have entered an individual's income from all sources, the total is reported on line 15000, total income. Their total income is then reduced by any deductions that the individual may have to arrive at their net income (line 23600). As noted earlier in this topic, net income is what the CRA uses to determine eligibility and calculate entitlement amounts for most federal and provincial/territorial credits and benefits.
After net income has been calculated, additional deductions, such as the Other payments deduction (for social assistance recipients) or the Northern residents deduction (for individuals living in a prescribed zone), are applied to calculate their taxable income (line 26000). Taxable income is the amount that CRA uses to determine the amount of federal and provincial tax owing.
Their taxable income is then multiplied by the applicable tax bracket. The eligibility guidelines for the CVITP are such that the majority of the individuals being helped will fall under the first federal tax bracket rate of 15%. Any taxable income that exceeds the threshold for the first federal tax bracket is multiplied by the next bracket, which is a higher rate. The amount of tax that is calculated is then reduced by the total amount of non-refundable tax credits (line 35000). The result of this calculation will give you the individual's total payable (line 43500), which is the amount of tax owed.
Provincial or territorial tax is also calculated using escalating tax brackets on the T1 income tax and benefit return for all provinces and territories except Quebec, where a separate provincial income tax return must be filed.
In the final step, the total payable amount is reduced by the total income tax deducted (line 43700) and by the total amount of any refundable tax credits (line 48200) that the individual may be eligible to claim. The result is one of three possible outcomes: a refund (line 48400), balance owing (line 48500), or nil, meaning no refund and no balance is owing.
Benefits and credits
Benefits and credits are amounts that families and individuals may be entitled to receive based on the income reported on their tax return and other eligibility criteria.
Every July, benefit and credit payments are recalculated based on a family's or an individual's net income from the previous year. For example, a change in income in 2021 will only be reflected in benefit and credit payments beginning in July 2022.
To receive or to continue to receive these benefits and credits, each individual and their spouse or common-law partner, if applicable, must file an income tax return each year. A return must be filed, even if there is no income to report, whether it creates a debt or the income is tax-exempt. Late filed tax returns could cause an interruption in benefit payments.
Some of the benefits and credits that individuals may be entitled to include:
- the Canada child benefit (CCB)
- the child disability benefit (CDB)
- the goods and services tax/harmonized sales tax (GST/HST) credit
- the Canada workers benefit (CWB)
For more information on benefits and credits, refer to Overview of child and family benefits.
The Canada child benefit (CCB) is a tax-free monthly payment made to eligible families to help them with the cost of raising children under 18 years of age.
The information provided on an income tax and benefit return is used to calculate the amount of the CCB payments.
For more information on the CCB, go to Canada child benefit.
The child disability benefit (CDB) is a tax-free benefit for families who care for a child under 18 with a severe and prolonged impairment in physical or mental functions.
To be eligible for this benefit, a qualified practitioner must certify, on form T2201 Disability Tax Credit Certificate, that the child's impairment meets certain medical criteria.
Once the CRA receives a completed form T2201, they will review the information provided and advise if the child is eligible for the disability amount and the CDB supplement.
For more information, go to the Child disability benefit.
The goods and services tax/harmonized sales tax (GST/HST) credit is a tax-free, quarterly payment that helps individuals and families with low or modest incomes offset all, or part, of the GST or HST that they pay.
When an individual files a tax return, the Canada Revenue Agency (CRA) will automatically determine their GST/HST credit eligibility based on their family net income.
If the individual has a spouse or common-law partner, only one will receive the GST/HST payment for the family, and the credit will be paid to the person whose return is assessed first. The amount of the credit that is calculated will be the same, regardless of which spouse or partner receives it.
For more information on the GST/HST credit, go to GST/HST credit – Overview.
The Canada workers benefit (CWB) is a refundable tax credit intended to provide tax relief for eligible low-income individuals and families in the workforce. It includes a disability supplement for eligible individuals who have an approved form T2201, Disability Tax Credit Certificate, on file with the CRA.
For more information regarding the CWB, go to Canada workers benefit – Overview (formerly known as working income tax benefit).
For more information on benefits specific to your province or territory, use the Benefits finder.
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