What is income tax?
An income tax is the portion of your earnings that you pay to support public services and Government programs.
In most countries, income tax is calculated based on a progressive system – the more money you make, the higher share you pay in taxes.
In Canada (as well as in the USA) the tax system is also progressive. The amount you pay in tax is calculated as a percentage of the amount you make. The system is based on the self-assessment principle. It means that you have to complete a tax return each year to report your income and calculate whether you owe tax or receive a refund.
There is federal and provincial income tax in Canada and you need to pay both. You can refer to the Government of Canada page to see the rates and try calculating how much money you need to pay in taxes based on the income you earn.
Your province of residence is determined by where you were living on December 31 of that tax year. Even if you lived in Saskatchewan until September, then moved to Alberta, you will file your income tax based on the Alberta rates.
What is an annual tax return?
The tax return that you submit every year before a certain due date, specified by the Revenue Agency, usually includes the following types of income:
Employment Income (when you work for someone and are an employee)
Self-Employment Income (when you work for yourself and when you have contracts with others)
Pension Income (if you are collecting pension because of retirement)
Investment Income (if you have a property that you are renting or if you have money in the bank savings account that is gaining interest)
There are also tax credits. In some cases, the money you have already paid into certain things can be used towards reducing the amount of income tax that you need to pay at the end of the taxation year. For example, if you have made a donation to support a charity and have kept a receipt, that amount can be counted as a credit towards your income tax. Check out this page to learn more about various income tax credits in Canada.
Why do we pay tax and what does it pay for?
Income tax is paid to support government services that we then receive.
Nothing in this world is really free and when you hear “free healthcare” or “free education” it is misleading, as those are still being paid for by the working residents of the country through their personal or business income taxes.
When individuals pay their income tax, they are entrusting the government to manage that money to ensure that the roads are good, that hospitals provide adequate care, that public schools provide quality education to children, etc.
However, it is extremely important to keep the Government accountable in return and ensure that the money is spent wisely. A special ministry within the Federal and the Provincial Governments is responsible for ensuring that public funds collected through income tax are spent efficiently. Special audit bodies complete regular checks.
As a resident/citizen of the country you need to be aware of the additional layers of the income tax or rate increases and question the reasoning behind them by contacting your Government representative. It is also a good idea to be aware how much the Government spends on various programs (national and international) and why. Government overspending is not uncommon and sometimes the priority is given to programs that would help a political party get re-elected. You work hard for your money – make sure you know what you are getting in return for paying your income tax diligently.