How does income tax work in Canada?
It costs money to run a country. Governments need revenue to fund things like health care, education, road construction and national defence.
Where does that money come from? Mostly from taxes. Essentially, our society pools its money to share the costs of things we all need or think are important.
There are a few different kinds of taxes in Canada, like capital gains tax, sales tax and payroll taxes that employers have to pay. But more than half of the federal government’s revenue comes from one specific kind of tax, income tax.
What is income tax?
Income is money that you earn from sources such as a job, business, or investments, and a portion of it must be given to the government.
This is called income tax.
Individuals have to pay it, and corporations do too. The specific percentage of your income you have to pay is determined by a complicated formula depending on where you live, how much you earn, and how many deductions, credits, and expenses you have. (More on those below.)
What are deductions, credits, and expenses?
Deductions, credits and expenses are all ways you can lower your tax bill.
What’s the difference?
- Deductions reduce your taxable income—a common example is RRSP contributions.
Non-refundable tax credits lower your tax payable—this includes things like the tuition tax credit and the disability tax credit.
- Expenses are the costs incurred while running a business—like the materials you buy to create the handmade jewelry you sell.
For example, you might have medical expenses, like the cost of removing wisdom teeth. In this case, you can claim it on your taxes to reduce your bill. But it’s important to note that although they are referred to as ‘medical expenses,’ they are actually considered a non-refundable tax credit.
If the terminology feels confusing, TurboTax automatically searches over 400 credits and deductions so you don’t have to.
Who collects income tax?
The Canada Revenue Agency (CRA) is a federal government agency that’s in charge of our tax system. Part of their job is collecting income tax.
If you have a job, your employer will usually take off income tax from your paycheque and send it to the CRA automatically. If you’re self-employed, you have to send payments to them directly.
Then, after you file your taxes, the CRA does the math and lets you know if there’s a balance owed in either direction. CRA will send you a refund if they’ve collected too much or ask you for payment if you owe them.
In Canada, you must pay income taxes to the federal government and the province or territory you live in. Unless you live in Québec, you only have to file your taxes once—the CRA organizes everything on behalf of the provinces and territories. Québec residents have to file two separate tax returns, one federal and once provincial.
When do you file taxes in Canada?
You file taxes once a year in the spring. For most people, your tax return is due to the CRA by April 30. (In 2023, because April 30 is a Sunday, you have until May 1).
If you or your spouse are self-employed, you have a bit more time to organize things: Your tax return is due by June 15. If you’re filing for the June 15 deadline and think you’ll owe the CRA, your payment is still due by April 30.
If you don’t pay what you owe by then, they’ll start charging you interest, 10% effective 2024, which is compounded daily beginning May 1.
At what age do you start paying taxes in Canada?
There is no specific age when you need to start paying income tax in Canada. Instead, you’re required to pay income tax once you start earning a certain amount each year.
If you have a job, your employer may automatically withhold income tax from your paycheque and send that money to the CRA, even if your total annual income is less than the basic personal amount. If that’s the case, you can get that money back by filing your taxes.
Even if you don’t have any money to get back, it’s a good idea to start filing your taxes once you’ve started earning an income for the first time.
One reason is simply for practice—to learn how to file taxes and get in the habit.
Another is that you need to file taxes to build up RRSP contribution room. Plus, if you have any medical or tuition expenses, even if you don’t have much income to claim them against, you can still transfer those credits to other family members. Or, in the case of tuition, you can carry the credit forward to future years when you’re earning more money.
If you have little or no income, you should still file. Filing allows you to receive any benefits and credits you may be eligible for, such as:
- goods and services tax/harmonized sales tax (GST/HST) credit
- Canada child benefit
- related federal, provincial or territorial payments
- Climate action incentive payment (for residents of eligible provinces)
What’s considered income for those 25 and under?
The most common source of income is employment, whether from a job or your own business. (Yes, being paid to weed your neighbour’s garden counts.) But there are other sources of income that you also have to pay tax on, including:
- Investment income (like interest on your savings account).
- Rental income (like if you own a house or condo and rent part of it out to another person).
- Withdrawals from RRSPs.
There are also some sources of income that are not taxable. These include:
- Most gifts and inheritances.
- Most lottery winnings.
- Withdrawals from TFSAs.
- Scholarships for qualifying students.
One tricky source of income for many young people is withdrawals from Registered Education Savings Plans (RESPs). The money that your investment earns while it is in the RESP, won’t be taxed until the funds are taken out to pay for the child’s education. Instead, it’ll get taxed in the students’ tax return.
Whether or not you attend post-secondary education, if you have an RESP, it’s a good idea to research how the taxes will work before you begin withdrawals.
What are some tax credits for young Canadians under 25?
Young Canadians are eligible for the same tax credits as everyone else, but some specific ones are more likely to apply if you’re under 25. These include:
Tuition tax credit
If you attend post-secondary education, your tuition and fees usually work as a tax credit. This applies to studies in university, trade school and other eligible training programs.
RRSP contributions
If you’re putting money into an RRSP to save for retirement, you can claim those contributions as a deduction.
Moving expenses
If you move within Canada for work or full-time study, and your new home is at least 40 km closer to your new work or school location, you can claim moving expenses as a deduction. For example, if you move to a new city for school and you ship your belongings, the shipping costs would count as a moving expense.
Self-employment expenses
If you run your own side hustle–or full-time hustle–things you purchase specifically for use in your business can be deducted from your income, lowering your tax bill. For example, if you make and sell jewelry, the raw materials you purchase count as a self-employment expense.
How can teenagers and young adults file their taxes?
Here are the steps involved in filing your taxes:
- Get your paperwork ready. Collect all relevant documents demonstrating your income, deductions, credits, and expenses. For example, if you have a job, your employer will issue you a T4 slip showing your employment income and any money they’ve deducted, such as for income tax or the Canada Pension Plan (CPP). These documents usually arrive at the beginning of the year, often in January or February.
- Get ready to file. Once you’ve got all your documents together (and they can be physical or virtual), sign in to TurboTax and fill in your tax return. This involves checking boxes, answering questions, and filling in numbers. Put on some nice music and pour yourself a delicious drink–make it fun!
- Submit your completed return to the CRA. Congratulate yourself on a job well done.
- Sit back and relax. Wait for the CRA to process your return and let you know if you owe any money (or if they owe you). They’ll send you a document called a Notice of Assessment(NOA) that outlines the details.
Case study
Let’s say Yared was a full-time university student in 2023. They had a part-time job at the library during the school year, and in the summer, they worked at one of the city’s summer camps. They also had to pay out of pocket for physiotherapy to recover from an injury. So Yared would need the following:
- A T4 slip for each job outlining their income and any deductions.
- A T2202 Tuition and Enrolment Certificate from their educational institution outlining their tuition and fees.
- Official receipts from their physiotherapist showing how much they paid for treatment.
Then, Yared would file their taxes using the information on these documents.
While Yared doesn’t need to send these documents to the CRA, they should store them in a safe place. Sometimes, the CRA asks for documentation about specific details to prove they’re true.
We’re here to support you
Filing taxes for the first time as a young adult can seem daunting, but it’s a necessary and important part of becoming financially responsible. That’s why understanding the basics of income, deductions, and tax credits, and using resources like TurboTax can help you successfully navigate the process.
With some effort and attention to detail, we’re here to help you turn filing taxes into a routine and manageable task that puts you on a path to financial stability and success.
