Income tax doesn't have a long history in Canada; the country has only utilized income tax to fund government activities since World War I. The history of Canadian income tax may be short, but it is filled with complex and fascinating moments.
Before the Institution of Income Tax
Prior to 1917, the Canadian government did not charge income tax. This was part of a plan to encourage immigration to Canada, as the UK and the US were charging income tax during this time period. It was hoped that by offering vast amounts of land for new immigrants to live on and not charging income tax, Canada could encourage people from other countries to make their new homes within its borders. Prior to the introduction of the income tax, Canada relied on money from tariffs and customs to provide revenue.
In 1917, the cost of participating in World War I had become too great, and the government was forced to temporarily adopt an income tax system in order to finance the war effort. What was going to be a temporary measure is now the largest form of income available to the Canadian government. Sir Thomas White, Minister of Finance, was the man who proposed the "war" income tax.
As with all aspects of Canadian provincial government, Quebec does things a little bit differently than the rest of the country. Quebec operates its own special personal income tax system. The province has complete autonomy to determine what sorts of income can be taxed. For the most part, however, Quebec is remarkably similar to the rest of the provinces in terms of administering income tax.
Current Laws: Personal Income Tax
As with most income taxes, Canadians today pay a percentage that is based on how much money they make. See the table listed under the Resources section for a full breakdown of marginal tax rates for personal income.
Not all types of income are taxed, however. For example, types of income not subject to income tax include gifts, inheritances, lottery winnings, gambling earnings or military pensions.
Current Laws: Corporate Taxation
Corporate income is taxed by the Canada Revenue Agency in most cases. However, the provinces of Ontario, Quebec and Alberta collect their own corporate income taxes. Starting in 2009, Ontario's taxes will collected by the CRA. Corporations and companies must pay taxes on income and capital. Starting in 2002, some larger companies established income trusts in an effort to reduce or eliminate their income tax payments. Only half of income from capital gain is taxed.