One of the most consistently challenging aspects of contracting in Canada is complying with the country’s tax system. As well as paying tax in Canada, you might also still be eligible to pay some tax in your home country, and understanding the legislation behind this can be a challenge.
If you’re working in Canada under a permanent contract, many employers will handle your tax under the PAYE (pay-as-you-earn) system. This means that they calculate and process your taxes in Canada for you and then send you a net wage. Your income tax, public health insurance, social security and other deductions will all be covered by this payment. This is the easiest way to handle your income tax in Canada, but contractors may not be offered this service because of their short stay with each employer.
Anybody who can’t pay their tax in Canada through PAYE is left with the prospect doing everything themselves.
Do you know much about Canadian Tax Law? Does Canada have a tax treaty with your home country? You will need to find out or find someone who can help! Income tax in Canada can range from 15 to 33 percent (not including provincial/territorial taxes), and you need to be sure you are placed in the correct tax brackets.
If you are a contractor and want a calculation on your tax and net retention in Canada, we can supply it to you free of charge.
Contractors in Canada are faced with masses of paperwork and numerous wasted hours filing a tax return unless they find an alternative option. A Canadian umbrella company can act as your employer during your stay in the country whilst still allowing you the freedom of a contractor. The only difference is that you submit your timesheets to them; they’ll calculate and pay your taxes as you earn, and then you receive a net wage (as well as documentation for your records).
The companies are experts in Canadian taxation, and they’ll ensure that you keep the largest proportion of your earnings whilst complying with local laws. They can deal with any issues with the Canadian tax office or tax department directly including processing your tax refund if you are eligible.
We work with numerous umbrella companies in Canada, many of whom are experts in tax and immigration laws. If you have any questions about tax in Canada, we’ll get the answers from them directly so you can rest assured you’ll be getting accurate information. We have comprehensive knowledge of the different services they provide, and can help you find the right company to handle your income tax. We help oil and gas workers, software developers, IT project managers, testers, business analysts and telecommunications contractors get tax efficient payments and sponsorship for their Canadian work permit.
Our advice is 100 percent free, and comes with no obligations. You will be paying taxes in Canada but without the overhead of directly dealing with the Canadian tax authorities. Get in touch with us today for some reliable advice on tax in Canada!
Step 1: Collect all your information and supporting documents that show your income, such as your original T4 slip. Your employer should have given it to you before the end of February.
Register for ‘My Account’ here, to access the secure ‘Auto-fill my return’ service. You can use tax preparation software to automatically fill in parts of your return with information that the Canada Revenue Agency (CRA) has on file.
Step 2: Use a NETFILE-certified software product to fill out your tax return. You can access a list of certified software here. Some of these products are free, for example StudioTax. With a NETFILE-certified software product, there is no need to mail a paper return or upload ‘.tax’ files.
Step 3: Make sure your information is up to date. If there has been a significant change in your life e.g. you had a child, tell the CRA as soon as possible so that you continue to get your benefits on time.
Step 4: Report the income amounts you receive, from both outside and within Canada. Your forms should have instructions on where to report an amount. Find out which deductions, tax credits and expenses you can claim.
Step 5: File your tax return online using NETFILE. NETFILE allows you to file your income tax and benefit return electronically using a tax preparation software or web tax application. With NETFILE, you can get your refund in as little as 8 days, if you choose direct deposit.
Only one combined return needs to be filed for federal and provincial/territorial taxes (as the federal government collects taxes on behalf of all provinces and territories). Only the province of Quebec requires filing a separate tax return.
Step 6: Keep your supporting documents for at least 6 years.
Income tax is generally paid to one of the provinces or territories based on the individual’s residency on the last day of the year. Provincial/Territorial tax is calculated by applying their tax rates to taxable income.
Income tax is withheld from salaries. Individuals are required to pay quarterly instalments if their tax payable exceeds amounts withheld at source by more than CAD3,000 (CAD1,800 for Quebec residents) in both the current and either of the 2 previous years.
- Taxpayers are required to pay the greater amount: either the regular tax or the Alternative Minimum Tax (AMT). To calculate the AMT, recalculate taxable income, without deducting certain items that are otherwise deductible in the calculation of regular taxable income. If the recalculated taxable income exceeds CAD40,000, a combined federal and provincial/territorial tax rate of about 25% is applied to the excess, yielding the Alternative Minimum Tax. If the AMT exceeds the regular tax, the excess amount may be carried forward for 7 years. This means they are entitled to a credit in future years, when regular tax exceeds the AMT for that year.
- An individual who resides in or has earned income in any province or territory, is subject to provincial or territorial income tax, on top of federal income tax. Provincial and territorial taxes are collected by the federal tax authority, except in Quebec.
- Non-residents pay an additional 48% of basic federal tax on taxable income in Canada that is not earned in a province or territory. They are also subject to provincial/territorial rates on employment income and business income earned in the respective province or territory.
Tax Credits and Deductibles
- Contributions to a Registered Pension Plan (RPP), a Pooled Pension Plan (PRPP) or a Registered Retirement Savings Plan (RRSP)
- Alimony and child support payments
- Child care expenses where the maximum yearly deduction is CAD8,000 per child under 7 and CAD5,000 per child from 7-16
- Interest expense
- Personal allowance (see other tax credits and incentives)
- Business deductions for expenses that have been incurred to earn business income
- Capital losses (generally only deductible against capital gains)
You are generally considered a tax resident in Canada when:
- You maintain a fixed abode for yourself and your family in Canada; or
- You have social and business ties with Canada such as memberships in clubs and religious organisations, driver’s licenses, vehicle registration, and medical insurance coverage; or
- You are temporarily resident in Canada for 183 days or more and are therefore deemed to be resident in Canada for that entire year.
All factors are taken into account in determining an individual’s residence.
If an individual is considered to be a resident of both Canada and another country, tax treaties often provide residency ‘tie-breaker’ rules that override the general residency tests applied under Canadian domestic law. Under Canadian law and the residency provisions of most tax treaties, an individual is considered resident in the jurisdiction to which the individual has closer personal and economic ties.
Yes, tax residents are taxed on global income.