An Overview of Income Tax and Corporate Tax System in Canada

Canadian income tax constitutes the majority of the annual revenues of the Government of Canada, and of the governments of the Provinces of Canada. Canadian federal income taxes, both personal and corporate are levied under the provisions of the Income Tax Act. Provincial and territoria l income taxes are levied under various provincial statutes. The Canadian income tax system is a self- assessment regime. Taxpayers assess their tax liability by filing a return with the CRA by the required filing deadline. CRA will then assess the return based on the return filed and on information it has obtained from employers and financial companies, correcting it for obvious errors. A taxpayer who disagrees with CRA's assessment of a particular return may appeal the assessment. The appeal process starts when a taxpayer formally objects to the CRA assessment. The objection must explain, in writing, the reasons for the appeal along with all the related facts. The objection is then reviewed by the appeals branch of CRA. An appealed assessment may be confirmed, vacated or varied by the CRA. If the assessment is confirmed or varied, the taxpayer may appeal the decision to the Tax Court of Canada and then to the Federal Court of Appeal. Canada levies personal income tax on the worldwide income of individuals r esident in Canada and on certain types of Canadian-source income earned by non-resident individuals. The amount of income tax that an individual must pay is based on the amount of their taxable income (income earned less allowed expenses) for the tax year. Personal income tax may be collected through various means: Deduction at source - where income tax is deducted directly from an individual's pay and sent to the CRA. Installment payments - where an individual must pay his or her estimated taxes during the year instead of waiting to settle up at the end of the year. Payment on filing - payments made with the income tax return Arrears payments - payments made after the return is filed Canadian corporate tax includes taxes on corporate income in Canada and other taxes and levies paid by corporations to the various levels of government in Canada. These include capital and insurance premium taxes; payroll levies (e.g., employment insurance, Canada Pension Plan, Quebec Pension Plan and Workers' Compensation); property taxes; and indirect taxes, such as goods and services tax (GST), and sales and excise taxes, levied on business inputs. Corporations are subject to tax in Canada on their worldwide income if they are resident in Canada for Canadian tax purposes. Corporations not resident in Canada are subject to Canadian income tax on certain types of Canadian source income Canadian corporate tax is collected by the CRA for all provinces and territories except Quebec and Alberta. Provinces and territories subject to a tax collection agreement must use the federal definition of "taxable income", i.e., they are not allowed to provide deductions in calculating taxable income. These provinces and territories may provide tax credits to

companies; often in order to provide incentives for certain activities such as mining exploration, film production, and job creation. In Canada, corporate income is subject to corporate income tax and, on distribution as dividends to individuals, personal income tax. To avoid this "double taxa tion" of the same income, the personal income tax system, through the gross-up and dividend tax credit (DTC) mechanisms, provides recognition for corporate taxes, based notional federal-provincial corporate tax rates, to taxable individuals resident in Canada who receives dividends from Canadian corporations. For more details please visit: www.taxca.com.