Industry News

Income Tax For Individuals

(Article is based on information available at the time it was written: 2022-03-12)

What is income tax? 

Income tax is a specific type of tax that is applied to the income earned by individuals across Canada. Taxes for individuals are broken down into 2 types. Federal income tax and provincial/territorial income tax. The federal income tax formula is based on a marginal tax rate, called “Progressive Taxation”. This means that everyone is taxed at the same rate for each dollar in a specific bracket. For example, in 2022 the federal tax for the first $50,197 of taxable income is taxed at 15%. The tax for every dollar above/between $50,197 to $100,392 is taxed at 20.5%. An individual who earns $40,000 annually and an individual who earns $80,000 annually pay the same 15% for the first $50,197. In this case the person making $80,000 would pay 20.5% of tax on the remaining $29,806 ($80,000 annual salary minus $50,197 15% tax bracket). Provincial/territorial income tax is similar, except the tax rate and brackets are different depending on the province/territory.

Why does income tax have to be paid? 

In the late 1800s and early 1900s Canada’s national debt rose considerably and attempts at borrowing and raising funds could not significantly shorten the gap on the deficit. The early years of WWI put greater strain on the Canadian economy and so the “Income War Tax Act” was proposed as a temporary measure. The federal government began taxing individuals as a means to earn revenue to fund the war. From this, the “Income Tax Act” came to be and income tax became permanent. Canada had one of the lowest tax rates in the world prior to WWI.

Why do employers remit the income tax on behalf of employees? 

Employers are legally obligated to collect and remit source deductions on remuneration paid. The mandatory source deductions include Income Tax, Canada Pension Plan Contributions & Employment Insurance Premiums. Employers may choose to outsource this function to a payroll service provider, who would then be responsible for remitting these deductions to the government on the employer’s behalf. For example, VPM (V-TAC Payroll Management) would collect and remit this on behalf of an employer.

What does the government do with the taxed money?  

In 2017-2018 personal income tax accounted for 49% of the total revenue earned by the federal government. The government uses these funds, alongside other sources of revenue for various reasons, including but not limited to funding various programs/agencies/departments, managing debt and building infrastructure. The exact spending and prioritizing of funds depends on the policies of the government in place at any particular point in time. For example, in 2016-2017 $48 billion was spend on elderly benefits, $36 billion on Canada health transfer and $25 billion on national defense.

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