Income taxes constitute the majority of the annual revenues of the Government of Canada, and of the governments of the provinces of Canada. In the fiscal year ending March 31, 2025, the federal government collected just over 2.5 times more revenue from personal income taxes than it did from corporate income taxes.

Tax collection agreements enable different governments to levy taxes through a single administration and collection agency. The federal government collects personal income taxes on behalf of all provinces and territories except Quebec. It also collects corporate income taxes on behalf of all provinces and territories except Alberta and Quebec. Canada's federal income tax system is administered by the Canada Revenue Agency (CRA).

Canadian federal income taxes, both personal and corporate income taxes, are levied under the provisions of the Income Tax Act. Provincial and territorial 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 the CRA's assessment of a particular return may appeal the assessment. The appeal process starts when a taxpayer formally objects to the CRA assessment, on prescribed form T400A. 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 the CRA. An appealed assessment may either 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.

History Unlike the United Kingdom and the United States, Canada had avoided charging an income tax prior to the First World War. The lack of income tax was seen as a key component in Canada's efforts to attract immigrants, as Canada offered a lower tax regime compared to almost every other country. Prior to the war, Canadian federal governments relied on tariffs and customs income under the auspices of the National Policy for most of their revenue, and the provincial governments sustained themselves primarily through their management of natural resources (the Prairie Provinces were paid subsidies by the federal government as Ottawa retained control of their natural resources). The Liberal Party considered the probable need to introduce an income tax if their negotiation of a free trade agreement with the United States in the early 20th century succeeded, but the Conservatives defeated the Liberals in 1911 by opposing free trade. The Conservative Party opposed income tax as it wanted to attract immigrants primarily from the United Kingdom and the United States, and it wanted to give immigrants an incentive to come to Canada.

Then Canadian Finance Minister Sir Thomas White's new "Income War Tax Act" bill went into Committee of the Whole on July 25, 1917 but faced resistance. Wartime expenses forced the Tories to reconsider their options, and in 1918 the wartime government under Sir Robert Borden imposed an income tax to cover expenses. Despite the new tax, the Canadian government ran up considerable debts during the war and was unable to forgo income tax revenue after the war ended. With the election of the Liberal government of Prime Minister William Lyon Mackenzie King, much of the National Policy was dismantled, and income tax has remained in place ever since.

Constitutional authority

The constitutional authority for the federal income tax is found in Section 91, Paragraph 3, of the Constitution Act, 1867, which assigns to the federal Parliament power over "the raising of Money by any Mode or System of Taxation".

The constitutional authority for the various provincial income taxes is found in section 92 paragraph 2 of the Constitution Act, 1867, which assigns to the legislature of each province the power of "Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes". The courts have held that "an income tax is the most typical form of direct taxation".Forbes v. A.-G. Man. A.C. 260,268

Personal income taxes

Canada levies personal income tax on the worldwide income of individual residents in Canada and on certain types of Canadian-source income earned by non-resident individuals. The Income Tax Act, Part I, subparagraph 2(1), states: "An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year."

After the calendar year, Canadian residents file a T1 Tax and Benefit Return for individuals. It is due April 30, or June 15 for self-employed individuals and their spouses, or common-law partners. Any balance owing is due on or before April 30. Outstanding balances remitted after April 30 may be subject to interest charges, regardless of whether the taxpayer's filing due date is April 30 or June 15.

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. instalment 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

Employers may also deduct Canada Pension Plan/Quebec Pension Plan (CPP/QPP) contributions, Employment Insurance (EI) and Provincial Parental Insurance (PPIP) premiums from their employees' gross pay. Employers then send these deductions to the taxing authority.

Individuals who have overpaid taxes or had excess tax deducted at source will receive a refund from the CRA upon filing their annual tax return.

Basic calculation

An individual taxpayer must report his or her total income for the year. Certain deductions are allowed in determining "net income", such as deductions for contributions to Registered Retirement Savings Plans, union and professional dues, child care expenses, and business investment losses. Net income is used for determining several income-tested social benefits provided by the federal and provincial/territorial governments. Further deductions are allowed in determining "taxable income", such as capital losses, half of capital gains included in income, and a special deduction for residents of northern Canada. Deductions permit certain amounts to be excluded from taxation altogether.

"Tax payable before credits" is determined using five tax brackets and tax rates. Non-refundable tax credits are then deducted from tax payable before credits for various items such as a basic personal amount, dependents, Canada/Quebec Pension Plan contributions, Employment Insurance premiums, disabilities, tuition and education and medical expenses. These credits are calculated by multiplying the credit amount (e.g., the basic personal amount of $14,538–$16,129 in 2025) by the lowest tax rate. This mechanism is designed to provide equal benefit to taxpayers regardless of the rate at which they pay tax.

A non-refundable tax credit for charitable donations is calculated at the lowest tax rate for the first $200 in a year, and at the second-highest or highest tax rate for the portion in excess of $200. Donations can result in a reduction in taxes of between 40 and 60% of the donation depending on the province of the taxpayer and type of property donated. This tax credit is designed to encourage more generous charitable giving.

Certain other tax credits are provided to recognize tax already paid so that the income is not taxed twice: the dividend tax credit provides recognition of tax paid at the corporate level on income distributed from a Canadian corporation to individual shareholders; and the foreign tax credit recognizes tax paid to a foreign government on income earned in a foreign country.

Provincial and territorial personal income taxes

Provinces and territories that have entered into tax collection agreements with the federal government for collection of personal income taxes ("agreeing provinces", i.e., all provinces and territories except Quebec) must use the federal definition of "taxable income" as the basis for their taxation. This means that they are not allowed to provide or ignore federal deductions in calculating the income on which provincial tax is based.

Provincial and territorial governments provide both nonrefundable and refundable tax credits to taxpayers for certain expenses. They may also apply surtaxes and offer low-income tax reductions.

The Canada Revenue Agency collects personal income taxes for agreeing provinces/territories and remits the revenues to the respective governments. The provincial/territorial tax forms are distributed with the federal tax forms, and the taxpayer need make only one payment—to CRA—for both types of tax. Similarly, if a taxpayer is to receive a refund, he or she receives one cheque or bank transfer for the combined federal and provincial/territorial tax refund. Information on provincial rates can be found on the Canada Revenue Agency's website.Canada Revenue Agency

Individuals in Canada generally pay income taxes on employment and investment income to the province in which they reside on December 31 of the tax year. This ensures that taxpayers who live in one province and work in another, or who move from one province to another, in most cases only have to file a tax return for one province. Individuals with business income have to pay tax on the business income to the province in which it was earned. If it was earned in more than one province, it is allocated based on a formula in the Income Tax Regulations. In addition to the income tax levied as a percentage of taxable income, one province, Ontario, levies a surtax as a percentage of tax over a certain threshold. Prior to the 2024 tax season, the province of Prince Edward Island additionally charged a surtax.