GENERAL OVERVIEW OF TAX SCHEME
Summary calculation of refund / amount owing:
Anyone who is a resident of Canada in a tax year 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 = 14.5% x Taxable Income
Net Federal Tax = Federal Tax minus Federal Non-Refundable Tax Credits.
Ontario Tax = 5.05% x Taxable Income
Net Ontario Tax = Ontario Tax minus Ontario Non-Refundable Tax Credits.
Refund or Amount Owing = Net Federal and Ontario Tax minus 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 (for most clients of an Ontario tax clinic):
Step 1: Calculate Total Income
Total Income includes:
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:
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.
Rates are higher for incomes above these amounts. As well, Ontario applies a surtax on higher-income individuals, but this won’t apply to typical tax clinic clients.
In addition to tax, 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 14.5% 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 14.5% 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 ($16,129) | Basic Personal Amount Tax Credit ($12,747) |
Age Amount Tax Credit (max $9,028 for persons age 65 or more as of end of tax year) | Age Amount Tax Credit (max $6,223 for persons age 65 or more as of end of tax year) |
Spouse or Dependant Tax Credit (max $16,129 or $18,816 if infirm) | Spouse or Dependant Support Tax Credit (max $10,823) |
Caregiver Tax Credit (max $8,601) | Caregiver Tax Credit (max $6,008) |
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 $1,762) |
Disability Amount ($10,138) | Disability Amount ($10,298) |
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 $1,471) | 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
First combine the net federal and net Ontario taxes. Then subtract any income tax the client has already paid—usually through source deductions from employment or pension income. And finally, add any refundable tax credits the client may qualify for.
Some refundable tax credits, such as the GST/HST credit, and the Ontario Trillium Benefit, are paid directly to taxpayers via cheque or direct deposit. Therefore these credits are not included in the refund or amount owing reported on the tax return.
Refundable tax credits that are applied in the calculation of a refund/payment owing include:
The Canada Workers Benefit is a special case because of advanced payments.
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 $57,375 of taxable income is 14.5%. However, everyone is entitled to a basic personal amount tax credit of 14.5% of $16,129. This effectively means that the first $16,129 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 $45,522 or less, an additional Age Amount Tax Credit applies: 14.5% of $9.028. This means that for lower-income seniors, at least the first $25,157 of taxable income ($16,129 + $8,790) is effectively tax-free at the federal level.
At the Ontario level, the analysis is much the same, but the tax rate is 5.05% instead of 14.5%.
Tax Deductions versus Tax Credits:
A tax deduction reduces net income. The resulting tax savings are calculated by multiplying the deduction by the taxpayer’s marginal tax rate. For example if a person’s marginal tax rate is 35% then a $1,000 deduction will reduce tax by $350. A $1,000 tax credit would only reduce federal tax by only $145 ($1000 x 14.5%). Deductions are therefore more valuable for higher-income earners with marginal rates above 14.5%.
Most tax clinic clients have taxable income falling in the first federal and Ontario tax brackets and therefore a deduction or credit of the same amount will result in the same tax savings.
However, deductions could be advantageous in other ways. Because a deduction lowers net income, it may increase eligibility for certain 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 will lower net income whereas a tax credit will 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 to a future tax year (which is reflected in UFile’s report of carryover amounts).
All individuals file their own tax return:
Canada does not allow joint tax filing, each person must file their own return. For example spouses each file their own return, and dependant children file their own returns. In UFile information may be inputted for spouses or a family, but UFile generates a separate return for each individual, and each tax return is filed separately.
When is filing a return mandatory?
A tax return must be filed if a person owes tax, owes CPP contributions from self-employment, has a taxable capital gain, or has disposed of capital property. Low income individuals are often in a situation where they are not required to file a tax return. However there are other reasons to file a return.
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, by not filing they could miss out on:
Some clients are required to file a return as a condition of maintaining subsidized housing. They may need to provide their landlord with a notice of assessment.
Additionally, some low-income earners will want to file a return to increase their Canada Training Credit or their RRSP contribution limit. Or they may file to allow for a transfer of 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:
Some tax return errors are corrected by the CRA during the assessment process. For example a missed T-slip amount may be added. However, you cannot count on corrections being made, and the responsibility for correcting a return always rests with the taxpayer. If a person discovers an error after filing, they are responsible for fixing it. This can often be done by filing a T1 Adjustment form.
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 choose to unilaterally reassess taxes within three years of sending the initial notice. After three years, a reassessment by the CRA 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 any reasonable request will be approved and 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 randomly for review or result from such things as:
During a review, the CRA may correct errors on their own and issue a Notice of Reassessment. Or the CRA may contact a person to request supporting documents, such as medical or charitable receipts, proof of rent, or evidence of self-employment income. Or the CRA may ask a question. After reviewing the response the CRA will issue a Notice of Reassessment if a change is made.
Both the Income Tax Act and the Ontario Taxation Act, 2007 require taxpayers to keep records to support the calculation of taxes. If the CRA challenges a deduction or credit, a taxpayer must provide compelling evidence to support their claim.
When the CRA or issues a Notice of Reassessment, they send a letter. If the taxpayer is not registered for email communication, the letter is mailed. If signed up for email notifications they will receive a short email prompting them to check their My Account mail. Failing to check My Account could leave a person unaware of a request for information, or a reassessment, or an amount owing. Emails from the CRA should not be ignored!
An audit is different from a review. It typically involves 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:
Tax returns 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 CRA will apply a penalty of 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%).
Of course if no tax is owing, there can be no penalty.
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, 2026, the rate is 7% per year (about 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, caused for example by 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 expect 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 or a payment plan. If a payment plan is agreed upon the CRA will not take enforcement steps. Interest generally continues to accrue unless the CRA later grants taxpayer relief.
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 an extension can be requested.
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.
CRA arbitrary assessments:
If a person does not file a tax return for a given year, the CRA can take the initiative to issue an assessment 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 it does not want to wait for the taxpayer to file a return.
If the person wants to dispute an arbitrary assessment there are two main options:
Option 1: They can file a Notice of Objection and submit a tax return in support of the objection. Filing a Notice of Objection will prevent the CRA from taking enforcement actions to collect the debt pending resolution of the dispute. A Notice of Objection must be filed within a prescribed time limit.
Option 2: The person can file a tax return. It must be filed by mail - not efiled. The CRA will review it and issue a Notice of Reassessment. The reassessment process can take several months or more. Without a Notice of Objection in place the CRA could continue collection efforts while the return is being reassessed and therefore Option 1 may be a better choice.
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 (not a department), and is separate from the ESDC. The CRA administers tax laws and delivers various benefits including the GST/HST benefit, 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 for 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 is able to 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 and 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.[2] These folios provide guidance and explanations, reflecting both court decisions and the CRA’s own interpretation of the law. While very helpful, folios are not legally binding on courts or the CRA.
For the general public, the CRA issues numerous guides, pamphlets, information circulars, and online resources. These materials are generally reliable for use in a tax clinic, but they also are not binding on courts or the CRA.[3]
Potentially useful Tax Folios for low to moderate income individuals include:
Potentially useful guides include:
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
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. Interpretations and rulings have been collected through Freedom of Information requests (with personal information removed) and are available from the Tax Interpretations web site.
[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] The CRA in the past has issued Interpretation Bulletins and Income Tax Technical News, but they are being phased out and replaced by Folios.
[3] 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.