6 February 1990 Ministerial Correspondence HBW 8199-2-1/HBW 6593-4 (E) F - Taxation of Salaries

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

February 6, 1990

Dear 19(1)

Thank you for your letter of December 19, 1989.  We are sorry to have taken so long to reply.

Our answers to your questionnaires A and B concerning the taxation of Salaries, wages and pensions are attached as Annex A and Annex 8- Your question about the tax status of a married taxpayer with one or two dependant children is dealt with in Annex 6 and the one about changes in the family unit in Annex D. We have generally followed the same format as in last year's outline.

We are not sure we understand your question about "rounding" tax or taxable income.  The taxpayer estimates his taxable income for the year by filling in his tax return in the prescribed manner. He then estimates the amount of tax payable on that amount of taxable income by using the prescribed tax table or by making the prescribed calculation in his tax return.  The amount so determined is the amount he pays.  (This is, of course, subject to verification by the tax authorities and the taxpayer may be assessed a greater or smaller amount of tax later on.) Generally much of the tax is prepaid by deductions at the source or by instalments on account and, when filing his return, the taxpayer only pays what remains owing at that time.  Conversely, if the prepayments result in an overpayment, he will receive a refund. If the balance owing is less than one dollar, it need not be paid.  Similarly, an overpayment of less than a dollar will not be refunded.  Other than that, there is no rounding-off.

Salaries, wages and pens ion payments are considered to be income of the year in which they are received, It follows that if the taxpayer receives a back-payment in respect of one or more previous years, it is nevertheless taxed in the year of receipt. There is no provision for allocating amounts relating to earlier years back to those years.

We hope this is the information you require.

Yours sincerely,

C. SavageA/DirectorProvincial and International Relations Division

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ANNEX A

Taxation of Salaries and Wages

Al.      Income from employment includes salaries, wages and taxable benefits.  The latter include the value of board and lodging, certain allowances for personal or living expenses or for the personal use of an automobile provided by the employer, and amounts paid by the employer on account of the employee's portion of premiums to a provincial hospitalization plan.  Certain benefits need not be included, such as employers contributions to a registered pension plan, the "Canada Pension Plan", the unemployment insurance fund, a private health services plan, a group sickness or accident insurance plan or certain group life insurance policies.  (The Canada Pension Plan is the national contributory pension scheme, an element in the social security system.)

A2.      The employee may deduct a tax credit of 17% of his own contributions to unemployment insurance and the Canada Pension Plan and certain tuition fees.  An employee's contributions to a registered pension plan and the registered retirement savings plan may be deducted from taxable income within certain limits.  Similarly, persons who change their employment and move their residence to be closer to their new workplace may deduct certain moving expenses.  No distinction is made between public and private sector employees in determining eligibility for the credits and deductions.

A3.      All taxpayers may deduct a basic personal tax credit which for 1990 will be $1,048.73.  Those aged 65 or over may deduct an additional credit of $565.59.  Credits may also be claimed for the taxpayer's spouse, children and certain other relatives.  The law prescribes the maximum amounts that may be claimed for each category but these must generally be reduced according to the amount of the dependant's own income, Thus, by way of example, no credits are allowed for a spouse whose income for the year is over $5,655.00 or for a child under 18 whose income is over $2,969.00 The maximum credits deductible and amounts of permissible income are to be increased every year.  See also reference in Annex C.

     It should be noted that there are a variety of other credits and deductions but, since the Canadian tax system generally deals with the taxpayer's overall income (i.e. including income from employment, business, investments, pensions, etc.), it is difficult to say that any of them pertain specifically to salary and wage earners.  The former deductions for tuition fees, medical expenses and charitable donations have been replaced by tax credits effective for 1989.  Deductions for alimony and child care expenses are still permitted to arrive at taxable income.

A4.      After calculating taxable income (i.e. the overall income from all sources less authorized deductions) the taxpayer's federal tax may be determined by making a detailed calculation on a form provided for the purpose or, in many cases, by using a tax table, The allowable credits are deducted at this point.  The range of federal tax rates for 1990 is 17% on the first $28,275.00 of the amount taxable, 26% on the next $28,275.00 and 29% on any excess over $56,550.00.

A5.      In addition to the tax credits, certain other deductions may be made from the tax determined as above but, again, none pertain specifically to salary or wage earners.  We mention the foreign tax credit for persons whose income includes income from foreign sources, and the dividend tax credit for persons whose income includes dividends from certain Canadian companies.

     The federal surtax (3% of Basic Federal Tax), which must be added to the federal tax as determined above, is still in effect.  Host Canadians must also add a provincial tax which is calculated as a percentage of the federal tax at rates depending on the province in which they live, In all but one of the provinces the provincial tax is levied by the province but collected on its behalf by the federal government.

     There are also certain tax credits that are treated as payments on account.  Unlike the deductions and credits previously referred to (which merely reduce or eliminate the tax otherwise payable) these credits are actually refunded to the taxpayer to the extent that they cannot be fully utilized to absorb the tax otherwise payable.  The most notable of these credits are the child tax credit and the sales tax credit.  Again, they do not pertain specifically to salary and wage earners but are designed as a social measure to assist persons with low incomes.

Bl.      As taxpayers are normally expected to file income tax returns and the forms for any particular year are generally not printed until late in the year, it is possible to incorporate changes almost up to the last moment.

B2.      As the new system has only been in effect since 1988, it is not possible to provide you with statistics.  We would expect, however, that the incidence of the new credits would be similar to that of the deductions under the former system.  You will recall that we provided you with particulars for the 1987 year.

C.      Comprehensive tax tables were supplied to the OECD recently by our Source Deductions Division.

Annex B

Taxation of Pensions

In the Canadian tax system, pension income is taxed along with income from all other sources - see point A3 in Annex A.  Most of the general comments about deductions and credits and filing returns in Annex A apply equally to persons with pension income. Some credits and deductions are, of course, more likely to be claimed by pensioners than by wage earners.  These would include particularly the age credit and the pension credit.

A.      Like all other taxpayers, pensioners may deduct a basic personal credit of $1,048.73.  Those aged 65 or over may claim an additional credit of $565.59. 

     A taxpayer may also claim a credit for his spouse of $875.33.  If, however, the spouse's income is in excess of $514.00 the $875.33 must be reduced by 17% of the excess.  If the spouse is 65 or over, the taxpayer may be entitled to claim all or part of the spouse's age credit, depending on the spouse's income. 

     The taxpayer may also be entitled to a disability credit and all or part of his spouse's disability credit.  This credit of $565.59 is available to persons who have a severe and prolonged mental or physical impairment.

     Persons aged 60 or over may be entitled to a pension income credit of up to $170.  The exact amount depends on the person's age and circumstances and the amount of qualifying pension income received.  The credit is intended to encourage people to provide their own pensions and, therefore, social security pensions are generally not considered qualifying income.

B.      The return forms for 1990 are not yet available.  However, we have enclosed a copy of the 1989 return form and guide. 

     Family allowances received in a year will be required to be included in the income of the spouse with the higher income for the year, except in the case of spouses living separate and apart at the end of the year as a result of a marriage breakdown, and only the person required to so include such allowances in respect of a child will be allowed the dependant credit in respect of that child.

     As indicated in our covering letter, pension income is taxed in the year received. 

     The family is not taxed as a unit; individual members are taxed separately depending on their own income.  There are no joint returns for husband and wife.

C.      Most pensions are subject to tax withholding at the source in much the same way as salary and wages are - see relevant comments in Annex A.

Annex C

Taxation of Married Taxpayers with one or two children

A married taxpayer with children is taxed in much the same way as any other taxpayer - see general comments in Annexes A and B.  In addition to -his own basic tax credit, he' may also be entitled to deduct a married credit for his spouse and dependants' credits for his children.

The basic credit is $1,048.73; the credit for the spouse is $873.97 less 17% of the excess, if any, of the spouse's income over $514.00. It follows that there is no credit for a spouse whose income is over $5,565.00.

Dependant credits for children are tied to each child's age and income.  They amount to $67. 83 for each of the first two children age 18 or under and $135.66 for each additional child, There is also a $257.04 credit for any dependant, age 19 or over, who is mentally or physically infirm.  In each case, the credit is reduced by 17% of the amount, if any, by which the dependant's income exceeds $2,570.00. It follows that the $67.83 credit will be lost if the child's income is more than $2,969.00 The 135.66 and $257.04 credits disappear when the dependant's income exceeds $3,368.00 and $4,082.00.

In addition to these credits the taxpayer may also be able to claim certain child care expenses.  Basically, this is a deduction from income of actual expenses up to prescribed limits for child care which were incurred to enable the taxpayer or other supporting person (usually the taxpayer's spouse) to earn income from employment or self-employment, to carry on research for which a research grant was received or to take an occupational training course for which an adult training allowance was paid.

There is also still the child tax credit which is a social measure to assist persons with low incomes.  The maximum credit for 1990 is 575.00 per eligible child.  A supplement was announced of $203.00 for 1990 and subsequent years.  The supplement, which is also applied as a tax credit, must be reduced by 25% of the child care expenses described above.

Annex D

Changes in the Family Unit

As mentioned in Annex B, families are not taxed as a unit in Canada. Instead family members are taxed individually, depending on their own circumstances and income.  See also references in Annex C about the deductions and credits allowed to a taxpayer for certain dependant members of his family.

A person who is no longer married (i.e. divorced) will no longer be entitled to claim the married credit for a spouse.  He may, however, be entitled to an "equivalent to married credit" if he has custody of one or more children whom he supports in a dwelling maintained by him.  In certain circumstances, he may be able to deduct from income qualifying alimony or separation payments to the former spouse or spouse from whom he is separated.  If the spouse or former spouse has custody of the children, he may also be able to deduct payments for their maintenance.

A divorced taxpayer who marries again may be able to claim alimony and maintenance payments for the former spouse and children in his/her custody and, at the same time, married and dependant credits for the new spouse and children.

Generally, in the year of separation or divorce, the taxpayer may claim tax credits or the deduction for alimony and maintenance, whichever is more advantageous.  Qualifying alimony, separation and maintenance payments are generally considered to be income to the receiving spouse or former spouse.  The spouse or former spouse may be able to claim credits for any children in his/her custody.