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  • Income Tax in Canada - Individuals


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    GET READY FOR YOUR FIRST TAX RETURN AND BENEFITS CLAIM


    All the persons living in Canada have a statutory obligation to comply with the laws of Canada and to abide by economic laws, the most important is Income Tax Act. Filing timely, proper and accurate income tax return is very important because of the following reasons:
    1. It impacts the other programs – Child Tax Benefit Program, GST/HST Credit Refunds, Social Assistance (Old Age Pension Benefit) etc.
    2. It impacts the social welfare programs – housing, education, retirement etc
    3. One may be subject to interest, penalties under the Income Tax Act
    4. It impacts the financing of your business, personal loans etc.

    Therefore everybody liable to file income tax return, should do the needful with in the time period prescribed under the law. This article is to make you comfortable with your duty to file your income tax return and to minimize your tax liability and maximize your benefits under the law.

    Under Subsection 150(1), each individual file income tax returns for each taxation year

    where a tax liability exists, or
    where the individual has either a capital gain or disposed of a capital property or
    where Home Buyers Plan or Life Long Learning Plan balance is a positive amount

    The first two grounds for filing tax return are clear and major grounds. The third one is applicable to the individuals who have taken out the funds from their Registered Retirement Savings Plan to buy their first principal residence in Canada and claimed deduction under Income Tax Act. Such individuals are liable to replenish their Registered Retirement Savings Plan within 15 years from the year of such withdrawal. This scheme will be further explained to you in the next issue along with the other issues of taxation of Individuals.

    According to Income Tax Act in Canada, 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.

    This is the charging section and the terms ‘Person’, ‘Resident in Canada’ and ‘Taxable Income’ are to be clearly understood to determine your tax liability.

    Persons are defined in Section 248(1) of the Act as both an individual and a corporation or anybody representing such persons. Three major categories of persons are Individuals, Corporations and Trusts which represent Individuals and corporations.

    Resident is not defined under the act. Yet the distinction between Full time resident, a part time resident and a non resident is important because critical basis for taxation in Canada is Residency.

    An individual is deemed a full time resident for the whole year if he stays in Canada for a duration aggregating to 183 days (24 hour periods) or more in a calendar year. Full time residents are subject to tax on their world wide income or global income throughout the entire calendar year. All domestic and foreign sources of income including capital gains are to be reported on the Income Tax Return however foreign tax credit may be allowed on the full amount of the foreign tax paid or an international tax treaty or convention may limit the right of Canada to tax on foreign income.

    An individual is deemed a part time resident if he stays in Canada for a duration of aggregating to less than 183 days (24 hour periods) in a calendar year. Part time residents are subject to tax on world wide income earned while considered resident in Canada.

    Non residents are the persons who do not reside in Canada. They are subject to tax only on income from Canadian Sources. To become a non resident for tax purposes a tax payer must demonstrate that most ties have been severed:

    Regularity and length of visits to Canada
    Ownership of a dwelling unit in Canada on a long term basis
    Residence of spouse, children and other dependents
    Origin and background of the Individual
    Business or employment ties in Canada
    General routine of Individual Life

    There are three major categories of Corporations deemed resident in Canada and subject to income tax in Canada:
    Corporations incorporated after April 27, 1965 are deemed resident in Canada.
    Corporations incorporated before 1965 may be deemed resident of Canada if the corporation becomes resident in Canada at any time under the common law or if the corporation carried on business in Canada after that date.
    Corporations incorporated outside Canada after 1965 could still be deemed resident in Canada if the central management and control of the corporation’s board of directors occurs in Canada.

    Corporations incorporated abroad and central management and control if exist outside Canada are subject to income tax as Non resident Corporations.

    FILING DEADLINE AND DUE DATE FOR TAX PAYMENTS: - The filing deadline and due date of tax liability payments for the three categories of tax payers are as per the table below. Individual taxpayers who own more than $2000 in federal taxes in the current year and either of the two preceding years must submit quarterly instalments by the 15th of the March, June, September and December of the current taxation year.


    STATUS Filing Deadline Due Date of Tax
    1 Individuals April 30 of the following calendar Year (June 15 if self employed or spouse of a self employed person) Withholding tax and/or quarterly instalments
    2 Corporations 6 Months from year end 2 months from year end (3 Months for Canadian Private Corporations) Quarterly Instalments
    3 Trusts and Estates 90 Days from the year end Quarterly Instalments


    INTEREST AND PENALTIES: - A taxpayer who fails to file a return or failure to report income will be subject to interest and penalties. Interest on late or deficient instalments is assessed from the date the instalment should have been made. In addition, penalties of 50% of the interest charged in excess of the greater of $1000 or 25% of the interest calculated will apply.

    ITA Reference Offence Penalty
    1 162(1) Failure to file a tax return by the required date 5% of unpaid tax plus 1% of unpaid tax for each month in arrears (maximum 12 months)
    2 162 (2) Second offence within 3 years of first offence 10% of unpaid tax plus 2% of the unpaid tax for each month in arrears (maximum 12 months)
    3 163(1) Failure to Report income for second time with three years of first offence 10% of unreported income
    4 163(2) Evasion – gross negligence Greater of $100 and 50% of the under-reported income


    In view of the above provisions it becomes quite important to ensure that all the persons particularly new immigrants should file their return of income timely and accurately. New immigrants should file their return of income even if they have landed in Canada in the later half of the calendar year to get timely payments of following benefits:
    Child Tax Benefits
    GST Credit Refunds

    For example if a person has landed in the month of December, although he is a part time resident in Canada, he should file his return of world wide income. By filing return, he/she will get their benefits paid out timely. In their first return they have to pay taxes only on the income earned during the period of their stay in Canada. Considering low income earned during that period of first year in Canada, their entitlement to child tax benefits and GST credit refund will be much higher than later years. For GST Credit, they should submit information about the rent paid, GST paid on membership ship, professional dues etc.

    Under the income tax in Canada, all the permanent residents and new immigrants have to state in their tax return whether they hold assets and property for more than $100000 in foreign country or not. If yes, they should explain what type of property or assets they are holding.

    I would like to conclude with the fact that sooner is better to comply with the income tax law and under Income Tax Act of Canada, there are so many rules and provisions that may be available to you for minimizing your tax liability and maximizing your refund claim under Income Tax and your entitlement to benefits programs. It is advisable to consult any designated tax professional to help you.

    I will further explain the issues related to Individuals and Small Business Corporations in the coming weeks. In case you are looking for any further information, please feel free to contact me at or post a question for me on http://www.canadiandesi.ca" rel="nofollow">LINK 


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