Income taxes are imposed at the federal level, as well as by the various provinces and territories. Federal income tax is levied on the worldwide income of every Canadian resident and, subject to the provisions of any applicable income tax convention, levied on the Canadian source income of every non-resident who is employed in Canada, who carries on business in Canada or who realizes a gain on the disposition of certain types of Canadian property. Generally, a province or territory will also impose an income tax on persons resident, or carrying on business, in the provincial or territorial jurisdiction. Certain provinces also tax non-residents on gains realized on the disposition of certain types of Canadian property situated in the province.
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The combined federal and provincial rate of income tax imposed on corporations varies widely depending on the nature and size of the business activity carried on, the location of the activity and other factors. In 2019, the highest combined rate of income tax applicable to non-Canadian-controlled private corporations was approximately 31%, while the lowest rate applicable to the ordinary business profits of such a corporation was approximately 26.5%. Tax credits and other incentives are also available in certain circumstances to reduce the effective tax rates.
Individuals are subject to graduated rates. These rates depend on the type of income, the province of residence and other factors. In 2019, the highest marginal combined federal and provincial rate of tax on taxable income of an individual was approximately 54%, while the lowest top marginal combined federal and provincial rate was approximately 47.5%.
Canada also levies a 25% withholding tax on the gross amount of certain types of Canadian source income of non-residents.
Payments subject to withholding tax include dividends, certain types of interest, rents, royalties and certain management or administration fees. Withholding tax can also apply to payments made between non-residents if the payments relate to a Canadian business or to certain types of Canadian property. Generally, there is no Canadian withholding tax on interest paid by a Canadian resident to arm’s-length non-residents of Canada (other than interest that is contingent on the use of or production from property in Canada, or interest that is computed by reference to revenue, profit or cash flow). An applicable income tax convention may reduce or eliminate the relevant rate of withholding tax. While withholding taxes are imposed on the non-resident
recipient, the payer is responsible for withholding the tax from amounts paid to the non-resident and for remitting the withheld amount to the government.