Canadian Tax Law

When the Canada was officially formed in 1867, the British North America Act enabled the federal government to collect revenue in nearly infinite ways. The one exception was direct taxation, which was a method agreed to be reserved wholly for the provinces. The federal government was entrusted with the most expensive programs of the time, namely defense and railroad construction. The provinces were limited to collecting sales, property, and income taxes. The provinces were also in control of most revenues from natural resources. When the British North America Act was enabled, the general consensus was that the provinces had enough revenues sources; many of the largest areas of spending today were not then funded by the government. These include social assistance and healthcare.

At the time, most of the federal government's revenue came from taxes on trade and excise tax. The provinces made the bulk of their revenue on licensing, permits, and fund transfers from the federal government. Corporate taxes were incorporated in the end of the 1800's.

During the Great Depression, the provinces encountered a predicament. Most of their revenues were a direct result of a healthy economy, and suddenly they were responsible for the increasing welfare costs that they could not cover with their current revenue model. Since the federal government's revenues came from different sources that were not as tied to the weakened economy, they were able to transfer payments to the provinces to make up the difference. This is a system that is still in use today.

In 1917, Canada implemented a temporary income tax to help fund World War I. The income tax has since become permanent. During World War II, the revenue the federal government received from indirect taxation fell considerably, from 90 percent in 1913 to 40 percent in 1946. Since then, income and other direct taxes have supplied of the government's revenue.

Both the Canadian federal and provincial governments impose personal income taxes on Canadian citizens. The amount of income tax paid increases with the rate of income, so that higher income Canadians pay a more than their neighbors with lower incomes.

There are, however, ways to defer personal income tax. Canada allows its people to defer funds to either a Registered Retirement Savings Plan (RRSP) or other savings accounts earmarked for retirement, including mutual funds and other similar retirement accounts.