Income Tax Act

Definition

The Income Tax Act (ITA) is the primary legislation governing federal income taxation in Canada. 

What is the Income Tax Act?

The Income Tax Act applies to individuals, corporations, trusts, and other organizations subject to taxation in Canada. It governs the determination of taxable income, the calculation of taxes owed, and the reporting and filing requirements for taxpayers.

The Income Tax Act sets out the progressive tax rates and income brackets used to calculate the amount of tax owed by individuals and corporations. Tax rates vary based on the level of income earned, with higher-income earners subject to higher tax rates. However, it provides for various deductions, exemptions, and credits that taxpayers can claim to reduce their taxable income and overall tax liability. These may include deductions for expenses incurred in earning income as well as tax credits for specific activities or circumstances.

Taxpayers are required to follow specific deadlines and requirements set by the Canada Revenue Agency (CRA) for reporting income, claiming deductions and credits, and filing tax returns. This involves complying with regulations established by the relevant legislation and ensuring the timely submission of returns and payment of any taxes owed.

The Canada Revenue Agency (CRA) administers and enforces the Income Tax Act, ensuring compliance with tax laws and regulations. The CRA conducts audits, investigations, and assessments to verify the accuracy and completeness of taxpayers’ filings and to address instances of non-compliance or tax fraud.

Example of the Income Tax Act

Canadian businesses are eligible to claim deductions for certain business expenses. For example, if a small business purchases new equipment for $10,000 to improve its operations, it can deduct the cost of the equipment as a business expense when calculating its taxable income. This deduction reduces the business’s taxable income, resulting in lower taxes owed and improving its financial position.