GENERAL OVERVIEW OF TAX SCHEME
Summary calculation of refund / amount owing:
Anyone who is a resident of Canada at any time during the year—including those who are ordinarily resident—must pay income tax on their worldwide income for the period they are a resident, regardless of where the income is earned. For most tax clinic clients, the calculation works as follows:
Total Income
– Deductions
--------------------
= Net Income
– OW, ODSP, Worker’s Comp
--------------------
= Taxable Income
Federal Tax = 15% x Taxable Income
Net Federal Tax = Federal Tax – Federal Non-Refundable Tax Credits.
Ontario Tax = 5.05% x Taxable Income
Net Ontario Tax = Ontario Tax – Ontario Non-Refundable Tax Credits.
Refund or Amount Owing = Net Federal and Ontario Tax – Certain Refundable Tax Credits. If negative, the person gets a refund. If positive, the person owes the CRA.
Note: Some refundable tax credits are included in the calculation of the refund/amount owing. Certain other refundable tax credits are not part of the calculation, but instead, they are paid directly via cheque or direct deposit at a time or times after a tax return is filed.
Longer explanation of calculation:
Step 1: Calculate Total Income
Total Income includes, among other things:
Total Income does not include:
Step 2: Calculate Net Income
Net Income is Total Income minus eligible deductions. Common deductions include:
Step 3: Calculate Taxable Income
Taxable Income is Net Income minus, among other things:
Taxable Income is used to calculate both Federal tax and Ontario tax.
Step 4: Calculate Federal and Ontario Tax
Once taxable income is determined, we can calculate both the federal and Ontario tax before applying any tax credits.
Ontario also applies a surtax on higher-income individuals, but this does not apply to typical tax clinic clients.
In addition, Ontario charges an Ontario Health Premium:
Step 5: Subtract Non-Refundable Tax Credits to get Net Federal and Ontario Taxes
Federal non-refundable tax credits are subtracted from federal tax, and Ontario non-refundable tax credits are subtracted from Ontario tax. If the resulting amount is less than zero, the tax owing is set to zero, since tax cannot be negative.
Most federal tax credits are calculated by multiplying 15% by a specified or calculated amount. Ontario tax credits are generally calculated by multiplying 5.05% by the specified or calculated amount. An exception is charitable donations, which use different rates.
Common non-refundable tax credit amounts are shown in the table below. To calculate the actual credit, multiply the amounts in brackets by 15% for federal tax and 5.05% for Ontario tax, except for donations, which follow their own rates.
Federal amount | Ontario amount |
Basic Personal Amount Tax Credit ($15,705) | Basic Personal Amount Tax Credit ($12,399) |
Age Amount Tax Credit (max $8,790 for persons age 65 or more as of end of tax year) | Age Amount Tax Credit (max $6,054 for persons age 65 or more as of end of tax year) |
Spouse or Dependant Tax Credit (max $15,705 or $18,321 if infirm) | Spouse or Dependant Support Tax Credit (max $11,581) |
Caregiver Tax Credit (max $8,375) | Caregiver Tax Credit (max $5,844) |
CPP Contributions Tax Credit (Some goes toward a deduction, and some to a credit) | CPP Contributions Tax Credit (equal to federal credit) |
EI Premiums Tax Credit (Full amount of premiums paid) | EI Premiums Tax Credit (Full amount of premiums paid) |
Pension Income Credit (max $2,000) | Pension Income Credit (max $1,714) |
Disability Amount ($9,872) | Disability Amount ($10,017) |
Medical Expenses Tax Credit (expenses minus 3% of net income) | Medical Expenses Tax Credit (expenses minus 3% of net income) |
Donations Tax Credit (rate of 15% for first $200 then 29% for balance) | Donations Tax Credit (5.05% for first $200 then 11.16% for balance) |
Interest on Student Loans Tax Credit (full amount) | Interest on Student Loans Tax Credit (full amount) |
Canada Employment Tax Credit (max $1,433) | Low Income Individuals and Families Tax Credit (max $875) |
Tuition Tax Credit (tuition minus Canada Training Credit, if any) | There is no Ontario equivalent |
Home Accessibility Tax Credit (max $20,000) | There is no Ontario equivalent |
Some amounts are potentially transferable to a spouse or relative who can instead claim the credit:
Some amounts can be carried forward to claim a credit in a future tax year:
Step 6: Subtract pre-paid tax and add certain refundable tax credits to get amount owing or refund
At this stage, we combine the net federal and net Ontario taxes, subtract any income tax the client has already paid—usually through source deductions from employment or pension income—and then add any refundable tax credits the client may qualify for.
Some refundable tax credits, such as the GST/HST credit, the Ontario Trillium Benefit, and the Canada Workers Benefit, are paid directly to taxpayers via cheque or direct deposit. These credits are not included in the refund or amount owing reported on the tax return.
Certain other refundable tax credits are applied in the calculation of a refund/payment owing, including:
For lower income individuals, what income can be earned before they start having to pay tax?
At the federal level, the tax rate on the first $55,867 of taxable income is 15%. However, everyone is entitled to a basic personal amount tax credit of 15% of $15,705. This effectively means that the first $15,705 of taxable income is not taxed, as the tax and credit offset each other. (Note: OW, ODSP, GIS, and Worker’s Compensation are not considered taxable income.)
For seniors with a net income of $44,325 or less, an additional Age Amount Tax Credit applies: 15% of $8,790. This means that for lower-income seniors, at least the first $24,495 of taxable income ($15,705 + $8,790) is effectively tax-free.
At the Ontario level, the analysis is the same, but the tax rate is 5.05% instead of 15%.
Even when no income tax is owed, CPP contributions are required on income over $3,500. In Ontario, a health premium may also apply. As a result, a tax return for a low income individual could still show an amount payable, particularly for self-employed individuals earning more than $3,500.
Tax Deductions versus Tax Credits:
A tax deduction reduces total income to calculate net income. The resulting tax savings are determined by multiplying the deduction by the taxpayer’s marginal tax rate. For example, a $1,000 deduction reduces tax by $350 if the marginal rate is 35%, whereas a $1,000 tax credit would reduce federal tax by only $150. Deductions are therefore more valuable for higher-income earners with marginal rates above 15%.
For most tax clinic clients, whose income falls within the first federal tax bracket (15%), the tax reduction from a deduction is generally the same as that from a credit.
However, deductions can still be advantageous in other ways. Because a deduction lowers net income, it may increase eligibility for benefits or credits that are reduced when net income is higher. For example, the Canada Workers Benefit is reduced if net family income exceeds $26,149. A deduction can help lower net family income, whereas a tax credit does not.
Note about use of the word “spouse”
When the word ‘spouse’ is used in the documents of this website, it typically means a cohabited spouse and common law partner. For more information about these terms, see the document, Spouses, Cohabited Spouses, and Common-law Partners.
Order of Precedence for Non-refundable Tax Credits:
If a person has more non-refundable credits than needed to reduce their tax to zero, UFile applies the credits in a specific order, following CRA rules. For example, the tuition credit is applied before the medical expenses credit. This order can affect whether certain credits are carried forward in UFile.
Do spouses file a joint tax return, or do parents and their dependent children file a joint tax return?
No. Canada does not allow joint tax filing; each person must file their own return. While tax preparation software can prepare multiple returns at the same time, it still generates separate returns, each of which must be filed individually.
When is filing a return mandatory?
Individuals must file a tax return by April 30 following the tax year if they owe tax, have payable CPP contributions from self-employment, have a taxable capital gain, or have disposed of capital property.
Reasons to file a tax return even if not mandatory:
Many tax clinic clients do not owe tax, are not entitled to a refund, and are not required to file a return. However, they may still choose to file because, without a return, they could miss out on some or all of the following:
In addition some clients are required to file a return as a condition of maintaining subsidized housing. They may be required to provide their landlord with a notice of assessment.
Additionally, low-income earners may want to file a return to increase their Canada Training Credit or their RRSP contribution limit. They may also need to file in order to transfer a tuition amount to a parent or to carry forward a tuition credit to a future year.
Low income Ontarians paying electricity bills may get reductions through the Ontario Electricity Support Program. The filing of tax returns is required for ongoing eligibility to this program.
Free software for filing:
Tax clinics use UFile. If a client is interested in doing their own tax return using free software, the CRA maintains a list of certified products. Wealthsimple’s product is popular.
Errors:
Errors on a tax return are often corrected by the CRA during the assessment process. However, you cannot count on corrections being made, and the responsibility for correcting them always rests with the taxpayer. If a person discovers an error after filing, they are responsible for fixing it—usually by submitting a T1 Adjustment form or using a tax software’s refile option.
Examples of errors the CRA may correct before issuing a Notice of Assessment include:
Notices of Assessment:
After a return is filed, the CRA issues a Notice of Assessment summarizing their review of the return and explaining any changes made. In some cases, the CRA may contact the filer for additional information before issuing the notice, although this is uncommon.
The notice indicates whether there is a refund, a zero balance, or a balance owing. It also reports amounts such as:
The CRA can reassess taxes unilaterally within three years of sending the initial notice. After three years, reassessment is still possible, but only in cases of misrepresentation or fraud.
Taxpayers may request an adjustment to an assessment within 10 years of the end of the tax year. For example, a request to adjust a 2019 assessment can be made until the end of 2029. If the request is made more than three years after the Notice of Assessment was issued, the CRA has discretion to approve it, but reasonable requests are generally processed.
Unless there was misrepresentation or fraud, adjustments requested after three years can only be favorable to the taxpayer (i.e., reducing taxes or increasing a refund). Taxpayers do not have the right to object to or appeal such adjustments.
CRA Reviews and Audits:
The CRA has several types and levels of review.[1] A return may be selected for review for several reasons, including:
During a review, the CRA may correct errors on their own or contact the taxpayer to request supporting documents, such as medical or charitable receipts, proof of rent, or evidence of self-employment income. If the review leads to changes, the CRA will issue a Notice of Reassessment.
Both the Income Tax Act and the Ontario Taxation Act, 1997 require taxpayers to keep records in a form that allows the CRA to determine taxes payable. If the CRA challenges a deduction or credit, the taxpayer must provide compelling evidence to support their claim.
When the CRA requests receipts or issues a Notice of Reassessment, they send a letter. If the taxpayer is not registered for email communication, the letter is mailed. If they are signed up for email, they receive a short notification prompting them to check their My Account mail; the email does not describe the content. Failing to check My Account could leave the taxpayer unaware of requests or reassessments, and interest may accrue if the reassessment results in an amount owing. Emails from the CRA should not be ignored.
An audit is different from a review. It is a formal process involving a detailed examination of a taxpayer’s records to ensure compliance with tax laws. Audits can be conducted at the CRA’s office (“desk audit”) or at the taxpayer’s home or business (“field audit”).
Penalties for late filing of a tax return:
If a person is required to file a tax return, it is due by April 30. If April 30 falls on a Saturday, Sunday, or public holiday, the return is due on the next business day.
If a return is filed late, the penalty is 5% of the tax owing, plus 1% for each full month the return is late, up to a maximum of 12 months (totaling 17%).
If the CRA specifically requires a return to be filed and a penalty was applied for any of the previous three tax years, the penalty increases to 10% of the tax owing, plus 2% for each full month the return is late, up to 20 months (maximum 50%).[2]
Interest on tax debt:
If tax is owing, the payment due date is April 30, regardless of when the return is filed or when the Notice of Assessment is issued. Any overdue tax accrues interest at a prescribed rate, compounded daily. The interest rate can change each quarter; for example, from January 1 to March 31, 2025, the rate is 8% per year (approximately 0.02% per day).
Collection of tax debt:
The CRA has two main ways to collect a tax debt:
Requests to cancel penalties and interest:
The CRA may cancel penalties or interest if the taxpayer can show that the debt arose due to circumstances beyond their control. Examples include a postal strike, serious illness or accident, or severe emotional or mental distress, such as the death of an immediate family member.
Penalties or interest may also be cancelled if the taxpayer is experiencing financial hardship, particularly if paying the debt would make it difficult to afford basic necessities like food, medical care, or shelter.
Requests for relief can be submitted online through MyAccount or by completing Form RC4288 – Request for Taxpayer Relief - Cancel or Waive Penalties and Interest. The CRA will require supporting documentation.
Requests to defer payment or enter into a payment plan:
If a person cannot pay a tax debt, they can contact the CRA to request more time to pay, during which penalties and interest may be suspended. Alternatively, they can arrange a payment plan to pay the debt over time, such as making smaller monthly payments until the debt is fully repaid.
To make a request, call the CRA at 1-888-863-8657. It is important to be prepared to explain the reason for the request, and the CRA may ask for supporting documentation.
Debts related to CERB or other COVID benefits are handled separately. See the document on COVID benefits for more information.
Tax Disputes:
If a person disagrees with a CRA Notice of Assessment, the first step is to call the CRA to discuss the issue. If the matter is not resolved, the person can file a Notice of Objection with the CRA Appeals Intake Centre. An appeals officer will review the objection, attempt to resolve the dispute, and issue either a reassessment or confirm the original assessment.
A Notice of Objection must be filed before the later of:
If the deadline is missed, it may still be possible to request an extension.
If the person disagrees with the appeals officer’s decision, they can file a claim with the Tax Court of Canada. Further appeals can be made to the Federal Court of Appeal and then to the Supreme Court of Canada.
Reversing an assessment made by the CRA on its own-initiative:
If a person does not file a tax return for a given year, the CRA can issue an assessment on its own using the limited information available, such as T-slips. This is sometimes called an “arbitrary assessment.” The CRA will send a Notice of Assessment, which may show an amount owing. This approach is used when the CRA believes tax is due and does not want to wait for the taxpayer to file a return.
If the person disputes the assessment, there are two main options:
Option 1: If the person is within 90 days plus one calendar year of the Notice of Assessment, they can file a Notice of Objection and submit a tax return in support of the objection. Filing a Notice of Objection prevents the CRA from collecting the debt until the dispute is resolved.
Option 2: The person can file a tax return by mail only. The CRA will review it and issue a Notice of Reassessment. However, this process can take several months, and without a Notice of Objection in place, the CRA may continue collection efforts while the return is being reassessed.
CRA vs Service Canada:
Service Canada is part of a department known as Employment and Social Development Canada. Among other things it manages:
The CRA is an agency (rather than a department), and is separate from the ESDC. The CRA administers tax laws and delivers various benefits including the GST/HST benefit, Canada Carbon Rebate, Canada Child Benefit, and certain provincial benefits including the Ontario Child Benefit and Trillium benefits.
Each has their own on-line accounts: a CRA My Account and a My Service Canada Account. However, the same user ID and password can be used to access both accounts.
Each has its own registration for direct deposit. If a person receives CPP or OAS by direct deposit, that does not mean they are registered for direct deposit with the CRA.
Tax Slips:
The Income Tax Act Regulations require information returns (often referred to as tax slips or T-slips) to be issued in prescribed form in respect of various payments and benefits, including:
T4 Statement of Remuneration Paid
T4A Statement of Pension, Retirement, Annuity and Other Income
T4E Statement of Employment Insurance and Other Benefits
T5007 Statement of Benefits
T4A(P) Statement of Canada Pension Plan Benefits
T4RSP Statement of Registered Retirement Savings Plan (RRSP) Income
T4RIF Statement of Income from a Registered Retirement Income Fund
T4A(OAS) Statement of Old Age Security
T5 Statement of Investment Income
T3 Statement of Trust Income Allocations and Designations
T2202 Tuition and Enrolment Certificate
Regulations require that the issuers of these T-slips file them with the CRA, which is why the CRA can make them available for their auto-fill service.
Sources of Tax Law:
1. Statutes (primarily the Income Tax Act and the Ontario Taxation Act, 2007)
2. Regulations (primarily the Income Tax Act Regulations)
3. Tax Treaties
4. Court decisions (primarily from the Tax Court of Canada)
Federal income tax is governed by the Canada Income Tax Act, while Ontario income tax is governed by the Ontario Taxation Act, 2007. Both Acts are supported by regulations. In addition, Canada has international tax treaties with other countries, which have the force of law.
Some provisions in these Acts or regulations contain terms that are undefined or unclear, which can lead to disputes resolved through court decisions. These decisions also form part of tax law. For example, the Income Tax Act requires residents of Canada to pay tax, but it does not define “resident.” The CRA relies on court decisions to determine the meaning of this term.
To assist tax professionals, the CRA issues Income Tax Folios on specific topics.[3] These folios provide guidance and explanations, reflecting both court decisions and the CRA’s interpretation of the law. While helpful, folios are not legally binding on courts or the CRA.
For the general public, the CRA also provides numerous guides, pamphlets, information circulars, and online resources. These materials are based on the same legal sources and are generally reliable for use in a tax clinic, but they are also not binding on courts or the CRA.[4]
Potentially useful Tax Folios for low to moderate income individuals include:
Other potentially useful publications include:
One other source of guidance is technical interpretations and rulings by the CRA. The CRA can be asked to provide one of these on a specific tax issue. Many of these rulings have been compiled through Freedom of Information requests (with personal information removed) and are available though this web site.
While all of these publications are available on line, for the general public audience it appears the CRA is relying more and more on informational web pages rather than publications. The CRA’s launch page for tax information is Taxes - Canada.ca
[1] CRA’s review programs include: Pre-assessment Review Program; Processing Review Program; Request Verification Program; Refund Examination Program; Supplementary Examination Program; Matching Program; Special Assessments Program; and Identity Protection Services Program.
[2] See s.162(2) and s.150(2) of the ITA.
[3] The CRA in the past has issued Interpretation Bulletins and Income Tax Technical News, but they are being phased out and replaced by Folios.
[4] For example, see Andrews v. The King (2023 Tax Court of Canada) where the court explains that the CRA’s guidance on medical expenses is not consistent with provisions of the Income Tax Act.