Income tax is a portion of your income (earned by various means) that is paid to the government. In Canada, income tax is managed by the Canada Revenue Agency (CRA), and the money from taxes is used to fund government services, like education, health care and the military.
As a student, you might be about to enter the job market, and knowing what income tax is and when to pay it is knowledge that can help you towards financial freedom.
We’re going to break down exactly how income tax works for Canadian citizens, which income is taxed and how to pay your taxes.
Canadian income tax 101
Most Canadian employers will automatically deduct income tax from your salary, and the deductions will be visible on your pay slip each time you get paid.
But, even though your company is paying your income tax for you, you still have to report all your earnings (including from sources outside of your job) to the CRA each year. This is done by filing an income tax return.
This tax return will allow the CRA to decide whether you paid sufficient tax on your income earned for the previous year. If you don’t pay enough tax, you will have to pay the outstanding amount. But, if you paid too much, the CRA will issue a tax refund.
If you’re self-employed or earn other sources of income, you are responsible for paying your own income tax.
When must income taxes be paid?
If it’s your first time doing your taxes, then you need to know when the filing date and the payment date are.
For individuals, these two dates fall on the same day: April 30. For self-employed people, the filing date is June 15, simply because self-employment taxes are more complicated.
It is important that you stick to these deadlines, otherwise you will receive fines and penalties, as well as interest on any outstanding tax that must be paid.
Which income is taxed?
Several different types of income are taxed:
- Employment income: This includes your wage or salaries, director’s fees, and any benefits you receive from your employer. Benefits include loans, use of business vehicles or subsidized living expenses. Benefits that are excluded are employer contributions to retirement saving plans.
- Self-employment income: This is the income you earn from working for yourself.
- Investment income: Any income earned from interest on investments. This includes capital gains and dividends.
Non-taxable income
Fortunately, not all types of income are taxed. The most notable of these non-taxable types are lottery and casino winnings. Whether you play at a land-based casino or at eCheck casinos online, you can take your earnings tax-free. Many players enjoy using eChecks to fund their accounts because they offer the security of methods like debit cards but with much lower fees.
No matter how you pay, gambling winnings are not a regular source of income and most Canadians can’t survive off of their winnings. According to the Income Tax Act, winnings from sports betting, online or physical casinos and horse racing are tax-free, no matter where you live.
Note, though, that any interest on your big wins is taxable, and you must declare this interest to the CRA. If you don’t, you will get fined.
Other types of tax-free income include:
- Gifts
- Inheritance
- Child benefit payments
- School or university scholarships
- Life insurance policy payouts
- Withdrawals made from a tax-free savings account
Income tax rates for 2024
How much money you need to pay as income tax is determined by how much income you earn. This kind of tax system is called a graduated system. People who earn more have to pay more tax.
Here is a breakdown of the federal tax rates for 2024:
- 15% of the first $55,867, and
- 20.5% on the next portion of income from $55,867 - $111,733, and
- 26% on the next portion of income from $111,733 - $173,205, and
- 29% on the next portion of income from $173,205 - $246,752, and
- 33% on income over $246,752.
How to do your income tax
You can either pay your own taxes if you don’t have many income sources, or pay someone to do it for you. And, you can either file your taxes online using certified tax software or use an old-school paper tax return. Just make sure you use a CRA-approved method.
Those with an easy tax return can make use of free tax clinics, which are run by volunteers during March and April to help novices with their taxes.
Most people use one of the following payment methods:
- Paying in person with cash, debit or a cheque at Canada Post or your own financial institution.
- Paying via mail.
- Paying online to the CRA using a bill payment.
- Using Visa, Mastercard or Interac to make a CRA My Payment.
- Electronic transfer with a credit card, debit card, PayPal or Interac.
Whichever method you end up using, make sure that you get a confirmation that the payment has been received by the CRA. You can do this by logging into your account. It can take up to 10 days to reflect.
What Happens When Income Tax Is Not Paid?
If you don’t pay your taxes, the outstanding amount will incur daily compounded interest. If you continue to not pay your taxes, the CRA will take legal action. To settle your outstanding taxes, they will seize your assets. If you’re in a position where you can’t pay by the payment date, make sure to contact the CRA to set up a payment arrangement.
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