The tax year for an individual in Canada is the calendar year.
In most cases, taxpayers must file tax returns by 30 April of the following year. Married taxpayers file separately; joint returns are not allowed. The filing deadline is extended to 15 June if the individual, or the individual's spouse, carried on an unincorporated business. There is no provision for any extension of these filing deadlines, unless they fall on a weekend, in which case the filing deadline is usually extended to the next business day.
Residents in Canada who own foreign investment properties whose total cost exceeds CAD 100,000 must file an information return (Form T1135) each year they own such properties. Exceptions apply to certain types of assets, such as those held in a foreign pension plan. The filing deadline is the same as for the individual tax return. If the total cost of the taxpayer’s foreign property is less than CAD 250,000 throughout the taxation year, the taxpayer can report the property using the streamlined information reporting requirements on Form T1135.
Individuals are also required to file an information report for certain assets held at the time they cease to be a Canadian resident if the total market value of the assets exceeds CAD 25,000. This report must be filed with the Canadian tax return for the year that they cease residency. This reporting is separate from the reporting of assets subject to deemed disposition upon the cessation of Canadian residence.
Payment of tax
Income tax is withheld from salaries. Any balance of tax owed is due 30 April of the following year. Individuals are required to pay quarterly instalments if their tax payable exceeds amounts withheld at source by more than CAD 3,000 (CAD 1,800 for Quebec residents) in both the current and either of the two previous years.
Tax audit process
The tax authorities are required to issue an assessment notice within a reasonable time following the filing of a tax return. These original assessments usually are based on a limited review of the individual's income tax return with the notice of assessment explaining any changes made to the return. The CRA may later request additional information or supporting documents for personal deductions claimed. Returns become statute-barred three years after the date of the notice of assessment unless misrepresentation or gross negligence is involved.
The CRA typically does not select salaried employees for audit unless the individual is also involved in a tax shelter or business venture. Self-employed individuals are selected randomly, after considering various factors, such as the individual's business and the type and amount of expenses claimed. Individual shareholders of CCPCs are selected based on the activities of and income reported from the corporation and the individual's transactions with related entities, including trusts and partnerships. To address specific compliance concerns, the CRA is targeting certain individuals and their families who hold interests in privately held domestic and offshore entities that have a value exceeding CAD 50 million.
CRA officials have the authority to require persons to answer questions in any form specified by them, and to provide reasonable assistance for any purpose related to the administration or enforcement of the relevant statute.
A taxpayer who disagrees with a tax assessment or reassessment may appeal. The first step is to file a formal notice of objection within 90 days from the date of mailing of the notice of assessment or reassessment, setting out the reasons for the objection and other relevant information. The deadline is one year from the due date of the return for the taxation year in issue, if this is later, for ordinary income tax and in other specific instances. The CRA will review the notice of objection and vacate (cancel), amend, or confirm the assessment. A taxpayer that still disagrees has 90 days to appeal the CRA's decision to the Tax Court of Canada. Further appeals can be made to the Federal Court of Appeal and the Supreme Court of Canada. However, the Supreme Court seldom hears income tax appeals.
Statute of limitations
A reassessment can be issued at any time within three years of the date of mailing of the original notice of assessment, or at any later time if the taxpayer signs a waiver of the three-year limit or if the tax authorities can prove fraud or misrepresentation in the return. 'Misrepresentation' can include neglect or carelessness as well as wilful default. The limit is extended a further three years in some cases (e.g. for transactions with non-arm's-length non-residents).
The CRA can reassess tax, after the end of the normal reassessment period, on a gain from the disposition of real or immovable property if the taxpayer does not initially report the disposition.
Topics of focus for tax authorities
Although CRA audits generally focus on non-salaried employees, individuals may be subjected to audit with regard to the following issues:
- Income versus capital gain issues relating to transactions involving the acquisition or disposition of investments and real estate.
- Deductions claimed against employment income.
- Charitable donations.
- Creation of trusts in provinces with lower tax rates.
- The conversion of:
- dividends into capital gains using corporate surplus stripping arrangements, or
- ordinary income into capital gains using derivative contracts.
- Intergenerational business transfers.
- Strategies that comply with Canada's tax laws but contravene its intention.
- Taxable benefits related to employment (e.g. personal use of corporate-owned aircraft, automobiles, and dwellings).
Failure to withhold tax for non-resident employees
Canadian tax authorities continue to focus their audit activity on employers who fail to withhold tax or apply for a treaty waiver from Regulation 102 withholding for commuters and business travellers. Under this regulation, employers (whether residents of Canada or not) that pay salaries or wages or other remuneration to a non-resident of Canada in respect of employment services rendered in Canada are required to withhold personal income tax unless a waiver has been received before commencing work physically in Canada. There are no 'de minimis' exceptions, and this requirement applies regardless of whether the non-resident employee in question will actually be liable for Canadian income tax on that salary pursuant to an income tax treaty that Canada has signed with another country. Complying is time-consuming and administratively burdensome.
An amount paid by a ‘qualifying non-resident employer’ to a ‘qualifying non-resident employee’ is exempt from the Regulation 102 withholding requirement.
Generally, a ‘qualifying non-resident employer’ must meet the following two conditions:
- Is resident in a country with which Canada has a tax treaty (‘treaty country’).
- Is at that time certified by the Minister.
A ‘qualifying non-resident employee’ must meet the following three conditions:
- Is resident in a treaty country.
- Is exempt from Canadian income tax under a tax treaty.
- is present in Canada for less than 90 days in any 12-month period that includes the time of payment, or
- works in Canada for less than 45 days in the calendar year that includes the time of payment.
To become certified, a non-resident employer must file Form RC473 (Application for Non-Resident Employer Certification) with the CRA. Certification is valid for two calendar years (after which time the employer must submit a new Form RC473), subject to revocation if the employer fails to meet certain conditions or to comply with its Canadian tax obligations.
The conditions to maintain non-resident employer certification include:
- Track and record on a proactive basis the number of days each qualifying non-resident employee is either working in Canada or present in Canada, and the income attributable to these days.
- Evaluate and determine whether its employees meet the conditions of a ‘qualifying non-resident employee’.
- Obtain a Canadian Business Number.
- Complete and file the annual T4 Summary and slips, if required.
- File the applicable Canadian corporate income tax returns if the corporation is ‘carrying on business in Canada’.
- Upon request, make its books and records available to the CRA for inspection.
Tax planning using private corporations
Canada has enacted legislation to combat tax advantages for high income individuals, gained through the use of private corporations. Income sprinkling (i.e. shifting income that would otherwise be realised by a high-tax rate individual [e.g. through dividends or capital gains] to low or nil tax rate family members) using private corporations has been restricted. The legislation provides some clarity on whether a family member is to be considered significantly involved in a business, and thus potentially exempted from being taxed automatically at the highest marginal tax rate on non-salary income or gains derived from that business. However, the legislation is also extremely complex when applied to typical business structures. This creates uncertainty for many business owners, without any grandfathering for current income splitting arrangements. The CRA has issued some guidance on the potential application of the rules through a number of example scenarios.
Retaining business income in a CCPC to earn income on passive investments is discouraged by:
- reducing the annual CAD 500,000 small business deduction limit, for a CCPC that (together with associated CCPCs) earned more than CAD 50,000 of passive investment income in the preceding year, by CAD 5 for every CAD 1 of investment income over CAD 50,000 (it is eliminated at CAD 150,000 of investment income), and
- entitling a CCPC to a refund of taxes paid on certain investment income only by paying ‘non-eligible’ taxable dividends, which are subject to a higher effective tax rate when received by a shareholder that is an individual.
Tax evasion and aggressive tax avoidance
In recent years, the federal government has made significant investments to strengthen the CRA's ability to unravel complex tax schemes and increase collaboration with international partners. Initiatives that have been introduced include:
- Increasing the number of CRA annual examinations of high-risk wealthy taxpayers.
- Increasing 12-fold the number of transactions examined by the CRA.
- Creating a special CRA program to stop 'the organisations that create and promote tax schemes for the wealthy'.
- Hiring additional auditors and specialists with a focus on the underground economy.
- Developing robust business intelligence infrastructure and risk assessment systems to target high-risk international tax and abusive tax avoidance cases.
Previously implemented tax measures to help the CRA combat international tax evasion and aggressive tax avoidance follow:
- Certain financial intermediaries are required to report to the CRA international electronic funds transfers (EFTs) of CAD 10,000 or more.
- The ‘Offshore Tax Informant Program’ compensates certain persons who provide information that leads to the assessment or reassessment of over CAD 100,000 in federal tax.
- Failure to timely file Form T1135 (Foreign Income Verification Statement), or to report all specified foreign property therein, will extend the normal reassessment period for this form by three years.
The CRA has maintained a steady inventory of over 1,000 offshore audits for the past few years. The government is also aggressively pursuing those who promote tax avoidance schemes, imposing penalties on these third parties. In addition, the CRA continues to receive calls from potential informants and written submissions under the Offshore Tax Informant Program, which has resulted in additional taxpayers being audited by the CRA. Quebec also has a similar program, the 'Reward Program for Informants of Transactions Covered by the General Anti-Avoidance Rule and Sham Transactions.'
The federal government has made recent investments to:
- Assist with the implementation of a publicly accessible corporate beneficial ownership registry by the end of 2023. The registry will be used by law enforcement, tax, and other authorities to access accurate and up-to-date information on the individuals who own and control corporations and to catch those who attempt to launder money, evade taxes, or commit other financial crimes.
- Further combat tax evasion and aggressive tax avoidance, allowing the CRA to fund new initiatives and extend existing programs, including:
- Increasing GST/HST audits of large businesses with the greatest risk of non-compliance.
- Modernising the CRA's risk assessment process to prevent unwarranted and fraudulent GST/HST refund and rebate claims and improve the ability to issue refunds to compliant businesses as quickly as possible.
- Enhancing capacity to identify tax evasion involving trusts and provide better service to executors and trustees.
- Improve the CRA's ability to collect outstanding tax debts in a timely way.
- Implement new technologies, tools, and IT infrastructure that match the growing sophistication of cyber threats and to improve the way benefits and services are delivered to Canadians.
The CRA has also focused audit efforts on addressing non-compliance in real estate transactions, particularly in the Vancouver and Toronto markets, by improving its tools and methods of obtaining more specific and useful information to enhance its ability to combat tax avoidance. Over the past several years, CRA audits have identified significant additional taxes related to the real estate sector and have assessed related penalties. Areas of specific focus include property flipping, pre-construction assignment sales, rental income from the real estate sharing economy, unreported GST/HST on the sale of a new or substantially renovated property, unreported capital gains, and unreported worldwide income. The CRA has created dedicated residential and commercial real estate audit teams in high-risk regions to ensure that tax rules relating to real estate are being followed. See Property flipping in the Income determination section for details of new rules to ensure that profits from flipping properties are taxed fully and fairly.
The 2022 federal budget made a five-year commitment to:
- Launch and lead a financial sector legislative review focused on the digitalisation of money and maintaining financial sector stability and security, with the first phase directed at digital currencies (including targeted consultations on crypto-assets; in November 2023, the Office of the Superintendent of Financial Institutions launched a consultation on the public disclosure of crypto-asset exposures by federally regulated financial institutions in Canada).
- Expand CRA audits of larger entities and non-residents engaged in aggressive tax planning.
Mandatory disclosure rules
To facilitate the timely receipt by the CRA of information on arrangements that involve aggressive tax planning, recently enacted legislation enhances Canada's mandatory disclosure rules by:
- changing the Income Tax Act’s existing reportable transaction rules
- introducing requirements to report ‘notifiable transactions’ and for specified corporations to report uncertain tax treatments
- extending the reassessment period in certain circumstances, and
- introducing penalties for non-compliance that will apply to both taxpayers and promoters or advisers.
Previous rules in the Income Tax Act required the reporting of a transaction to the CRA if it was considered an ‘avoidance transaction,’ as that term is defined for the purposes of the general anti-avoidance rule (GAAR), and it met at least two of three defined hallmarks. This resulted in only limited reporting by taxpayers.
To improve the effectiveness of the reportable transactions rules and to bring them in line with international best practices, the new legislation requires that only one of the hallmarks be present for a transaction to be reportable. It also amends the definition of ‘avoidance transaction’ for these purposes so that the rules apply if it can reasonably be concluded that one of the main purposes of entering into the transaction is to obtain a tax benefit. Additional amendments deal with promoters or advisers who promote these transactions and require them to also disclose these transactions.
The new legislation introduces a category of specific transactions to be known as ‘notifiable transactions’, giving the Minister of National Revenue, with the concurrence of the Minister of Finance, the authority to designate a transaction as a notifiable transaction. Similar to the approach taken by the United States, notifiable transactions will include both transactions that the CRA has found to be abusive and transactions identified as transactions of interest. The description of a notifiable transaction sets out the fact patterns or outcomes that constitute that transaction in sufficient detail to enable taxpayers to comply with the disclosure rule. Effective 1 November 2023, five types of transactions have been officially designated as 'notifiable transactions'.
The changes to the existing 'reportable transaction' rules in the Income Tax Act and new requirement for taxpayers to report 'notifiable transactions' are effective for transactions entered into after 21 June 2023. The requirement for 'specified corporations' to report 'uncertain tax treatments' is effective for taxation years beginning after 2022.
Tax debt avoidance
Although the income tax rules contain an anti-avoidance provision that is intended to prevent taxpayers from avoiding their tax liabilities by transferring assets to non-arm’s-length persons for insufficient consideration, recently enacted legislation introduces a new anti-avoidance rule, for transfers of property made after 18 April 2021, where, for the purposes of the existing tax debt avoidance rules, a tax debt will be deemed to have arisen before the end of the taxation year in which the transfer of property occurs if certain conditions are met, and may, in certain cases, deem a transferor and transferee to be dealing on a non-arm’s length basis at the time of the transfer. Finally, where the transfer of property was part of a series of transactions or events, the overall result of the series would be considered in determining the values of the property transferred and the consideration given for the property, instead of simply using the values at the time of the transfer.
Joint Chiefs of Global Tax Enforcement (J5)
Senior officials from the CRA and tax enforcement authorities in Australia, the Netherlands, the United Kingdom, and the United States are members of a joint operational group, called the J5. The J5 was formed to increase collaboration in the fight against international and transnational tax crime and money laundering. The group focuses on building international enforcement capacity by sharing information and intelligence, enhancing operational capability by piloting new approaches, and conducting joint operations.
Voluntary Disclosures Program (VDP)
In certain circumstances, penalties for non-compliance with tax reporting and payment requirements may be waived through an application to the CRA's VDP. The taxpayer must meet five conditions to qualify for the programme. The application must:
- be voluntary
- be complete
- involve the application or potential application of a penalty
- include information that is at least one year past due, and
- include payment of the estimated tax owing.
Key aspects of the VDP include:
- two 'tracks' of disclosures:
- a Limited Program when there is intentional conduct to be non-compliant or for corporations with gross revenue exceeding CAD 250 million in at least two of their last five taxation years and any related entities; requires participants to waive their right to object and appeal in respect of the issue disclosed, and
- a General Program when the Limited Program does not apply.
- pre-disclosure discussion service
- referral of transfer pricing applications to the Transfer Pricing Review Committee (therefore no relief will be granted under the VDP)
- specialist review of complex issues or large dollar amounts
- disclosure of the identity of an adviser who assisted the taxpayer in respect of the non-compliance, and
- cancellation of previous relief if a VDP application was incomplete due to misrepresentation.
VDP relief is not considered for applications that depend on an agreement being made at the discretion of the Canadian competent authority under a tax treaty provision. If a VDP application does not qualify for VDP relief, a taxpayer may still qualify for penalty and interest relief under the taxpayer relief provisions.
Sharing information for criminal matters
The CRA can use the legal tools available under the Mutual Legal Assistance in Criminal Matters Act to facilitate the sharing of information related to tax offences under Canada’s tax treaties, TIEAs and the Convention on Mutual Administrative Assistance in Tax Matters; these tools include the ability for the Attorney General to obtain court orders to gather and send information.
Tax information can be shared with Canadian mutual legal assistance partners for acts that, if committed in Canada, would constitute terrorism, organised crime, money laundering, criminal proceeds offences, or designated substance offences.
Quebec ‘Tax Fairness Action Plan’
Quebec's ‘Tax Fairness Action Plan’, contains actions that address tax havens, aggressive tax planning, transfer pricing, and e-commerce with suppliers having no significant presence in Quebec, among other things. Many of the actions rely on cooperation with federal authorities. It is an evolving plan that is modified as challenges arise. Key actions relating to individuals include:
- Improving income tax auditing of individuals:
- The CRA will ask foreign tax authorities for their approval to share, with Quebec and other provinces, information about Canadian residents on financial assets held abroad (see Common Reporting Standard [CRS] in the Other issues section for more information).
- The CRA will give the Quebec government access to information obtained from the CRA’s international EFT program (discussed above).
- Increasing penalties in respect of general anti-avoidance rule (GAAR)-based assessments to 50% (from 25%) of the amount of the tax benefit denied.
- Implementing a tax informant reward program that is similar to the federal ‘Stop International Tax Evasion Program’ (discussed above).
- Strengthening the mandatory disclosure mechanism, which requires reporting to Revenu Québec of certain transactions resulting in a tax benefit, and broadening the types of transactions that must be disclosed under this mechanism.
- Requiring mandatory disclosure to Revenu Québec of nominee agreements made as part of a transaction or series of transactions.
- Establishing a special regime to counter tax schemes based on sham transactions by adding new penalties for taxpayers, advisers, and promoters, and extending the standard reassessment period for an additional three years.
- Fostering tax fairness in the sharing economy by requiring individuals operating a digital accommodation platform to register, collect, and remit the tax on lodging.
- Increasing tax compliance in respect of certain transactions, by introducing a new tax slip to facilitate reporting of financial market transactions and requesting information about cryptoassets on tax return forms.
- Simplifying tax compliance, tightening regulations, educating taxpayers of their rights and responsibilities, and increasing inspections in certain sectors with a higher risk of tax evasion (e.g. renovation, construction, personal placement, transportation, money-services, and cryptocurrency).
- Deploying new tax audit initiatives at Revenu Québec, including hiring of additional staff to combat aggressive tax planning, monitor high-risk sectors, and increase inspection activities in all sectors of activity, particularly those considered at risk of tax evasion.
- Upgrading Revenu Québec service delivery to simplify taxpayer experience and fight tax evasion and fraud by modernising computer systems and strengthening information security.