If you work in Canada and your income is above the tax-free threshold, then you’ll need to pay tax and file your own tax return.
It may not be the most exciting part of moving to a new country, but it can really pay off to know a bit about your tax obligations so we’ve summed up what you should be aware about tax in Canada.
Canadian Income Tax: How It’s Calculated
All workers in Canada pay income tax, including international workers, residents, and non-residents.
There are both federal, and provincial income taxes and how much you pay depends on some factors.
One factor affecting what tax you pay is whether you’re considered resident or non-resident for tax purposes.
Most working holiday makers in Canada are non-resident and only pay tax on income earned in Canada.
However, if you stay longer, establish ties and normally reside in Canada, then you may become a resident for tax purposes and pay tax on your worldwide income.
The Canadian Revenue Agency (CRA) or a tax agent like Taxback.com can help you establish this if you are unsure.
If you earn over the tax-free allowance ($11,474 in 2016), then you must file a tax return with the CRA.
If you earn under this amount, then you may be eligible to claim the credit, and this is worked out on a form called a TD1.
What’s a TD1?
Here comes the fun part!
You’ll be asked to fill out some tax forms when you start your first job in Canada.
These are the federal and provincial personal tax credit forms used to determine how much tax you should pay on your income.
These forms are super important because they could mean the difference between you getting a tax refund or ending up owing tax to the CRA so make sure you fill them out carefully.
When do I complete the TD1 forms?
You’ll need to complete the forms when you start a new job for the first time in Canada, but there are also other times you’ll need to complete them:
- Anytime you have a new employer
- If you want to change the amounts from previous years
- If you want to claim the deduction for living in a prescribed zone
- If you want to increase the amount of tax deducted at source
You can find all these forms on the CRA website.
The federal form:
The provincial form will depend on the province:
Completing the TD1 forms for tax in Canada
There are 2 cases where you need to be extra vigilant when filling out the forms:
- You were working outside Canada in the same tax year, either in your home country or another country
If you earned income from outside Canada in the same year, you earned income from Canadian sources (Jan-Dec) then you might not be entitled to claim the personal tax credits that allow you to earn tax-free income in Canada.
The key is to watch out for the 90/10 rule. Basically, if you didn’t earn 90% of your income in Canada for that year, then the CRA will not let you earn tax-free income for that year.
However, if you earned 90% of the income within Canada, then you can claim the credits. Otherwise, you won’t be eligible and should not claim these credits on the TD1 federal and provincial tax forms.
In the case where you didn’t earn 90% of your income in Canada for that year then you should enter 0 in box 13 and tick No on the non-resident question on the TD1 form.
If you don’t fill this out correctly, you could end up owing money to the CRA.
- You work two or more jobs at the same time in Canada
If you take up more than one job in Canada, then you’ll be asked to fill out the forms for both jobs.
The key here is to remember that you cannot claim the credits twice.
You should only claim personal tax credits for one job if you indeed are eligible to claim them.
It’s usually most beneficial to claim the credits for the job the pays the most:
If you claim the credits twice, this will be an underpayment of tax and will be chased up by the CRA!
Filing your tax return in Canada
You’ll need to file and submit a Canadian tax return each year by the April 30 deadline.
The upside to this is you may get a tax refund if you overpaid.
If you choose to, you can use a registered agent like Taxback.com to help file your return.
They’ll do all the paperwork and ensure you claim any expenses you’re due.
To file your tax return, you’ll need your Social Insurance Number (SIN) and T4 or final payslip.
You must apply for a SIN before you start a job in Canada, and your T4 is a statement of your income what tax you paid to give to you by your employer, usually around Feb.
When to file your tax in Canada
While the deadline to file is April 30 you can file from around mid-February and the quicker, the better to avoid the rush with the CRA.
For example, if you worked from July 2015 until October 2016:
- In February 2016 you can file for the 2015 tax year
- If you’re owed a refund, you’ll have it in about 16 weeks
- In February 2017, you can file your 2016 tax return
Will I get a tax refund?
This depends on a number of factors including whether or not you overpaid tax.
Overpayments of tax in Canada can be broken into three categories:
- Overpayment of income tax
- Overpayment of CPP(Canadian Pension Plan)
- Overpayment of EI(Employer Insurance).
One way to find out if you’re due an estimate is by using Taxback.com’s online tax calculator here.
Here is how it works for tax in Canada:
Tax in Canada tips to remember:
- Apply for a Social Insurance Number (SIN) before you start your first job
- When filling out your TD1, don’t claim the personal tax credits if you earned over 90% of your income outside Canada. If you are unsure about this, then don’t claim the credits. Even if you end up overpaying, you’ll get a refund of this when you file your tax return.
- When calculating the 90/10 rule, use the net amounts
- Don’t claim the credits twice if you have two or more jobs. Claim for the job that pays the most, but only if you are qualified for them
- If you earn over the tax-free threshold ($11,474 for 2016), then you should keep receipts for transit passes, medical expenses, and work-related expenses
- Don’t forget to file your tax return by April 30
- You need your SIN and T4 Statement of Remuneration Paid to apply for a tax refund
Hopefully, this has cleared up just how tax in Canada works. This information was provided and verified by Taxback.com and we recommend them if you are thinking about using an agent to claim your tax back.
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