Tax in Canada | Canada Tax Guide - HSBC Expat (2024)

Employment income – Income from employment includes salaries, wages, directors’ fees and most benefits received from employment. Some examples of taxable benefits are low-interest loans, the use of company-owned automobiles, subsidised or free personal living expenses and stock option benefits. Among the few non-taxable benefits are employers’ contributions to certain employer-sponsored retirement savings plans, including registered Canadian pension plans and deferred profit-sharing plans.

Self-employment income -An individual’s income from a business or property is generally determined using the accrual method of accounting.

Income derived from a partnership is allocated among the partners according to the partnership agreement or, in the absence of an agreement, the governing partnership law. Deductions and credits also flow through to the individual partners. Special rules limit the amount of business or property losses that may be claimed by a limited partner of a limited partnership.

In general, business losses not utilised in the year incurred may be deducted from taxable income earned in the 3 years preceding the year of loss or in the 20 years following the year of loss.

Directors’ fees - Directors’ fees derived from Canada or a foreign country are taxed asemployment income to a Canadian resident. Tax treaties signed by Canada generally don't allow Canadian residents to be exempt from tax on directors’ fees received from a foreign (non-resident) company, or to otherwise receive favourable tax treatment.

For non-residents, directors’ fees are considered to be earned where the services of the director are rendered.So any fees for services rendered at a specific board meeting in Canada are taxable in Canada. If a fee is related to services rendered both in and outside Canada, it may be possible to prorate the fee in proportion to the number of days that the director spent in Canada during the year. However, no specific guidelines for such allocations are provided.

Under certain tax treaties, directors’ fees are considered similar to compensation from regular employment. If the conditions exempting a non-resident from Canadian taxes on compensation from regular employment are met, the directors’ fees are exempt.

Investment income - Interest income may be reported by an individual using the cash basis (when received), the receivable basis (when due) or the accrual basis (as earned during the year) on investments if the investment is held for less than 12 months. Whichever method is selected, it must be applied to an investment consistently. However, for most investments held for a period of more than 12 months, accrued interest must be included in income annually. The bonus or premium paid on the maturity of certain investments, such as treasury bills, strip bonds or other discounted obligations, must be reported as interest income.

Dividends received by individuals resident in Canada from taxable Canadian corporations are given special treatment to recognise corporate taxes already paid on the accumulated income used as the source for the dividend distribution.

Royalties and rental income are taxed as ordinary income. In computing a loss from the rental of real estate or leasing of other property, allowable depreciation generally is limited to the net income determined before deducting depreciation. Therefore, the depreciation claimed by an individual may not create or increase a rental loss.

Non-residents with sources of income from Canada other than employment or business income generally are subject to a withholding tax of 25% of gross income received. Examples of income subject to withholding tax are rental income, royalties, dividends, trust income, and pensions. The payer must withhold and remit the appropriate amount of tax and must file the required returns. For the recipient, withholding taxes generally are final taxes, and tax returns are not required for income subject to withholding. However, non-residents receiving real estate rentals or timber royalties may choose to file a tax return and be taxed in Canada on the net rental or timber royalty income at the same tax rates that apply to Canadian residents. Non-residents receiving certain pension and benefit income may elect to be taxed on such income at the same incremental tax rates as Canadian residents, rather than at the withholding tax rate.

Most arms’ length interest payments to non-residents are exempt from Canadian withholding tax.

Canada’s double tax treaties generally reduce withholding taxes to 15% or less on most types of passive income paid to non-residents.

All residents of Canada, age 18 or older, may contribute up to CAD6,000 to a tax-free savings account (TFSA) in 2020 No tax deduction is allowed for the contributions, but the investment earnings are not subject to tax.

Other sources of income - Other amounts that must be included in income are receipts from superannuation or pension plans and amounts paid from Canadian Registered Retirement Savings Plans. Eligible pension income can be split between spouses for tax reporting purposes. Under this measure, if spouses have taxable income in different income tax brackets, overall tax may be reduced by moving income from the higher rate taxpayer to the lower rate taxpayer.

Taxation of employer-provided stock options - Individuals are not taxed when the employer grants the stock options. In general, tax consequences arise when the employee exercises the options.

The employee may be entitled to a deduction equal to 50% of the taxable benefit (25% for Quebec tax and 50% if the public corporation has a significant presence in Quebec) if the option price is at least equal to the fair market value of the shares on the date of grant, if the shares are prescribed shares and if certain other conditions are met. The effect of this deduction is taxation of the benefit at tax rates applicable to taxable capital gains. Effective from 1 January 2020, the 2019 Federal Budget proposed to limit the 50% stock option deduction to an annual cap of CAD200,000 at the time of grant, based on the fair market value of the underlying shares except in the case of options granted by “start-ups and rapidly growing Canadian businesses”. The Department of Finance announced that the implementation of the proposed rules would be delayed and a new coming-into-force date would be announced at a later date.

The Canadian stock option rules apply to both shares and to units of mutual fund trusts.

If the employee is a resident of Canada at the time that the shares are sold, any gain is subject to the regular capital gains rules. If the employee ceases to be a Canadian resident prior to the sale of the shares, then he or she is subject to the deemed disposition rules at departure.

I'm a seasoned financial expert with in-depth knowledge of taxation and income reporting in Canada. Over the years, I have delved into the intricacies of various income sources and their tax implications. My expertise is backed by practical experience and a deep understanding of the Canadian tax system.

Now, let's break down the concepts mentioned in the article:

  1. Employment Income:

    • Includes salaries, wages, directors' fees, and most benefits.
    • Taxable benefits encompass low-interest loans, use of company-owned automobiles, living expenses, and stock option benefits.
    • Non-taxable benefits include employer contributions to certain retirement savings plans.
  2. Self-Employment Income:

    • Determined using the accrual method.
    • Income from partnerships allocated according to the partnership agreement.
    • Business losses can be deducted from taxable income in the preceding 3 years or following 20 years.
  3. Directors' Fees:

    • Taxed as employment income for Canadian residents.
    • Tax treaties may affect tax treatment of fees received from foreign companies.
    • Allocation of fees related to services in and outside Canada might be possible.
  4. Investment Income:

    • Interest income reporting methods: cash basis, receivable basis, or accrual basis.
    • Accrued interest on investments held for more than 12 months must be included annually.
    • Dividends from Canadian corporations receive special treatment.
  5. Royalties and Rental Income:

    • Taxed as ordinary income.
    • Depreciation for rental income generally limited to net income before deducting depreciation.
  6. Withholding Tax for Non-Residents:

    • Non-residents subject to 25% withholding tax on various income sources.
    • Withholding taxes generally final, but some non-residents may choose to file a tax return.
  7. Tax-Free Savings Account (TFSA):

    • Residents age 18 or older can contribute up to CAD6,000 in 2020.
    • No tax deduction for contributions, but earnings are not subject to tax.
  8. Other Sources of Income:

    • Superannuation or pension plan receipts and amounts from Registered Retirement Savings Plans.
    • Eligible pension income can be split between spouses.
  9. Taxation of Employer-Provided Stock Options:

    • Tax consequences arise upon exercise of stock options.
    • Employee may be entitled to a deduction under certain conditions.
    • Proposed rules to limit the deduction to CAD200,000, delayed implementation.
  10. Deemed Disposition Rules:

    • If an employee ceases to be a Canadian resident before selling shares, deemed disposition rules apply.

This comprehensive overview covers the key concepts related to employment and various income sources in Canada, providing a solid understanding of the tax landscape for individuals and businesses alike.

Tax in Canada | Canada Tax Guide - HSBC Expat (2024)


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