Illustrations by Wenting Li
Welcome to the fourth installment of The Newcomer’s Guide to Finances in Canada. (Not subscribed yet? You can sign up here.)
Here we’re going to talk about how the Canadian government takes plentiful chunks of your money in taxes – but also gives some of it back.
This, of course, is but a brief introduction to Canada’s vast and complex tax and benefits system. My main goal is to ensure you: a) don’t overestimate your Canadian take-home pay (a rookie mistake that has caught many a newcomer off guard); b) know what to expect when filing taxes; c) don’t leave money on the table in terms of government benefits you might be eligible for.
In that vein, my real-life nugget of wisdom in this newsletter is about taxes, tipping and why you may want to whip out a calculator before ordering anything at a restaurant.
Let’s get started.
Canadian taxes 101
Here are some of the most common types of taxes you’ll run into:
Sales taxes: Most prices you’ll see in Canada don’t include sales taxes, which are added at checkout. The full price you’ll pay is what you see on the price tag, plus anywhere between five and 15 per cent of that, depending on where you live.
Good to know: There’s a federal portion of the sales tax, known as the goods and services tax, or GST. PST stands for provincial sales tax (that’s the QST in Quebec), and in some provinces you’ll see HST, or harmonized sales tax, which combines federal and provincial sales taxes. In Alberta and the territories you only pay the GST.
Payroll taxes and deductions: In Canada everyone – including employers – discusses salaries in gross terms, that is, before taxes are applied. You have to remember to subtract taxes and other deductions to figure out your actual take-home pay. This calculator (leave the default settings as they are) will help you with that.
Fun fact: If you’re a salaried employee in Canada you may see a bump in your take-home pay toward the end of the year. That’s because your employer is done collecting deductions for pension and unemployment benefits (more on those below) for the year.
If you’re self-employed: You’ll have to set aside money for taxes and deductions on your own. You may also have to remit sales taxes. An accountant (more on how to find one below) can help with all of that.
Property taxes: If you own real estate or land in Canada, you’ll have to pay property taxes. You don’t have to worry about this if you’re renting.
What to know about filing income taxes:
- Do you need to file taxes? You’ll need to file taxes if you are what the government calls a “resident of Canada for tax purposes” (here’s what that means) and owe taxes. Note that you may still owe income tax even if your employer has been deducting payroll taxes from your paycheque.
While there’s no obligation to file taxes if you don’t owe money, it’s still a good idea to do so. In your first year in Canada you may be able to claim certain benefits without having to file taxes. But after that, the government will want to see your tax return every year to continue to deliver those benefits.
It’s also possible you’ve paid too much in taxes through the year, and the government owes you money. You’ll need to send in a tax return to receive your tax refund.
- Tax deadline: For most people the deadline to send in your paperwork and pay any taxes due is April 30. More details here.
- Help with your taxes: Filling out a tax return is tricky even for Canadians. Two options to help you along the way are to use tax software (some of which is free) or a tax preparer.
If you’re opting for tax software, choose one that’s certified by Canada’s tax agency, the Canada Revenue Agency.
If you choose to have a human being do your taxes for you (advisable if you’re self employed or have a complex tax situation), look for someone with the designation of chartered professional accountant (CPA).
Government benefits
The government will squeeze you for money, but you can also squeeze back. If eligible, newcomers can apply for the following three benefits during their first year in Canada even if they’ve never filed a Canadian tax return:
- GST/HST tax credit: If you have a low income, the government will pay you a quarterly amount to help offset the burden of sales taxes. Check if you qualify.
- Climate Action Incentive: Canadians pay a charge on fossil fuels, including gasoline, meant to reduce demand for them and lower greenhouse gas emissions. In some provinces, the federal government provides regular payments to help with the cost of this tax. The eligibility criteria are here.
- Canada Child Benefit: A monthly amount to help you with the cost of raising children under the age of 18. Depending on your income, CCB payments can amount to hundreds of dollars a month per child. Here’s more about the benefit.
Unemployment, disability and parental leave benefits:
Employment Insurance (EI) is a government safety net that provides unemployment benefits, short-term disability benefits and parental leave benefits, among others. You could receive as much as 55 per cent of your earnings, up to a certain maximum, for a number of weeks. (Famously, the standard parental leave in Canada is 12 months, with an option to choose reduced payments and extend it to 18 months.)
Good to know: If you’re self-employed, you’re not eligible for unemployment insurance but can still receive parental, sickness and other benefits if you choose to contribute to EI. That said, some self-employed Canadians find paying EI premiums isn’t worth it. (Quebec runs its own parental leave benefits program where participation is mandatory for self-employed residents as well.)
Retirement benefits:
Canada’s retirement benefits system is based on three pillars:
- Old Age Security: A modest, taxable monthly pension for Canadian citizens or legal residents aged 65 or older who’ve lived in Canada for at least 10 years as adults. You don’t have to have worked in Canada to qualify for OAS.
- Guaranteed Income Supplement: A supplement to the OAS for low-income seniors.
- Canada Pension Plan: A pension benefit for those who’ve been working in Canada. How much you’ll receive depends on the length of your work history in Canada and your average earnings. The standard age to claim CPP is 65. Unlike EI, CPP is also for the self-employed, who must contribute to it. (Quebec, as you may have already surmised, likes to do its own thing and runs the Quebec Pension Plan, or QPP).
Reality check: No matter how much you’ll get, government benefits alone don’t provide enough income for any kind of comfort in retirement. You’ll need to supplement with your own savings.
Social assistance
Social assistance, which Canadians also generically call “welfare,” is the country’s income support of last resort. Each province and territory runs its own program, which provides a minimum of financial assistance and other benefits to those with very low or no income or savings. Most newcomers are eligible for social assistance.
Take notice: While Canada is famous for its progressive social safety net, social assistance guarantees but the bare minimum for survival. Welfare recipients often live in deep poverty, including many with severe disabilities.
Which benefits are you eligible for?
There are many more benefits beyond the ones I mentioned. This benefits-finder tool can help you find out what you may qualify for.
🍁 SURVIVE AND THRIVE TIP
If you’re struggling to wrap your head around prices that don’t include sales taxes, let me tell you about menu items. When ordering at a restaurant, you’ll have to keep in mind not only the government’s share of your final bill but also the gratuity for your server.
A tip of between 15 and 20 per cent of your pre-tax total, depending on the quality of the service you received, was considered the norm until recently. These days, you’ll often see tip prompts as high as 25 or 30 per cent.
Tipping is a deeply entrenched cultural norm in Canada and something many service-sector workers rely on as part of their income. It’s also customary to tip cab drivers, food-delivery workers, hair stylists and those in the hospitality industry, among others. (You do not tip the owner of a business, the tip is for whoever provided the service you received.)
Make sure to estimate the tax-and-tip combo before you commit to a purchase. At the same time, beware of establishments that try to guilt customers into tipping even when it isn’t necessary. Tipping for takeout, for example, is not expected in the same way.
Dive deeper with Savvy New Canadians
Run by Enoch Omololu, a money expert and veterinarian who moved to Canada in 2011, the website Savvy New Canadians has become a destination for newcomers seeking personal finance information.
For more on taxes and benefits:
Sales Tax in Canada 2023: Guide to GST, HST, PST and QST Sales Taxes
Newcomer to Canada Benefits: What You Need to Know
Canada Child Benefit (CCB) Payment Dates, Application, and Amounts
Old Age Security (OAS) Explained
What is The Canada Pension Plan (CPP)?
Keep going with Globe personal finance columnist Rob Carrick
Rob Carrick, the Globe’s personal finance columnist, has helped Canadians make sense of investing, the housing market, retirement planning and every money-related topic under the sun for more than 30 years. He is one of Canada’s best-known and most-trusted sources on anything that might affect your wallet.
You can read Rob’s latest articles here.
Sign up for Rob’s twice-weekly newsletter here.
Listen to Stress Test, the Globe’s personal finance podcast hosted by Rob and Globe personal finance editor Roma Luciw, here.
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