The Canadian tax system relies on individuals to self-assess and report income to the Canadian Revenue Agency on a yearly basis.
Most of the system is regulated under the Canadian Income Tax Act, though provinces/territories regulate the provincial portion of income tax. However, the federal government also regulates some provincial/territorial taxation.
Failing to file one’s tax returns can result in penalties, such as fines, and in extreme cases, you can be charged under the Income Tax Act and/or the Criminal Code of Canada.
There are two main regulated bodies under the Canadian income tax system: individuals and corporations.
Any resident of Canada must file their yearly income taxes. Even a non-resident who worked or carried on business in Canada during a particular taxation year is liable to pay income taxes.
You will get either a T4 or a T5 from your employer early in the year, and then use that to fill out your T1. The T1 is called the General Income Tax and Benefit Return Form. You have to report all your income for the year on that tax return, regardless if it was inside or outside Canada. That includes income information from self-employment, any income you made from stocks, interest, dividends and more.
You are taxed on both federal and provincial/territorial income tax and have obligations to report to both.
What is a Canadian resident for income tax purposes?
If a person’s “centre of vital interest” is in Canada. For example, your family resides in Canada, you have personal property in Canada, etc., Additionally if you are in Canada for 183 days or over in a taxation year, you are considered a resident for income tax purposes. You don’t have to be a Canadian citizen, a permanent resident or an immigrant to be considered a resident.
If a taxpayer earns income from a business for a year, then this is considered the taxpayer’s business profit for the year.
Resident corporations must file a corporation income tax return, called a T2, every year unless they are exempt. They must file this document even if there is no taxable income for the year.
Keep in mind, there are also provincial/territorial corporate tax rates by which you are charged. Just like with individual income, there is both a federal and a provincial/territorial income tax rate.
When is a corporation considered a resident of Canada?
If the “central management and control” of a corporation is in Canada then the corporation is considered a resident. This means if most meetings are held in Canada and/or the board of directors meet mostly in Canada, etc., then the corporation will be considered a resident of Canada. Furthermore, if the corporation was incorporated in Canada then it’s considered a Canadian resident.
If you had a business in Canada, whether a small business or a corporation, and you provide goods and services, you would charge your customers GST or HST or both depending on the province or territory of your residence. HST usually only applies to participating provinces, which include: Newfoundland and Labrador, Ontario, Prince Edward Island, Nova Scotia, New Brunswick.
If you are charging customers one or both of these taxes, you have to file a GST and/or HST return. There are exceptions to having to register to GST/HST, which also means there are exceptions to having to file, but they are few and you will need to make sure that you are covered by the exception(s) if you don’t register or file.
If you are having trouble filing returns, or are in trouble with CRA, contact an accountant or tax lawyer. If you have been charged with an offence under the Canadian Income Tax Act or the Criminal Code of Canada see a lawyer as soon as possible.
Canada Revenue Agency
Guide for Canadian Small Businesses
An Introduction to Canada’s Tax System