Types of Taxes in Canada: A Plain-English Breakdown
- Lex Rose
- Aug 17
- 10 min read
Taxes! They say that only two things in life are certain: death, and taxes.
We know we pay taxes, everyone knows that! We go to the store and we pay taxes on the items we purchase. When we get our pay stubs, we see all the deductions that have been made, most of which are tax deductions.
So we know what taxes are, generally speaking, but the different types of taxes in Canada, and what each one actually does, is another story. We have to pay it, they're going to deduct from our paychecks anyway, so what does it matter? It matters more than we think.
Sales Tax: One of the Main Types of Taxes in Canada
Every province and territory in Canada charges some form of sales tax. Whenever you purchase something, you pay extra — a percentage of the item's price, tacked on as tax. You might have heard the terms GST, PST, QST, or HST (and some other clever nicknames merchants think up - check your receipts once in a while and you might get a good laugh).
GST or Goods and Services Tax (Federal)
GST is the extra 5% you see added to most things we purchase in Canada. It’s a federal sales tax, so you pay this on goods you buy anywhere, regardless of the province.
PST or Provincial Sales Tax
PST (Provincial Sales Tax) is the extra tax some provinces charge on top of GST. Think of it as your province’s way of adding its own little “service fee” to the things you buy.
HST or Harmonized Sales Tax
HST (Harmonized Sales Tax) is a combo tax — it blends GST and the provincial sales tax into one single number. Instead of two lines on your receipt, you just get one neat (but higher) tax line.
The federal government collects HST and then sends the provincial portion back to participating provinces. That money helps fund everyday services like healthcare, schools, roads, and other provincial programs.
Who pays what
With those different sales taxes happening in Canada, not every province & territory charges sales taxes the same way.
Alberta and the three Territories - Nunavut, Yukon, and Northwest Territories - don’t charge any provincial sales taxes, they only collect GST at 5%.
Then there are provinces New Brunswick, Newfoundland & Labrador, and Prince Edward Island who charge quite a bit more, with HST at 15%, while Ontario and Nova Scotia charge an HST of 13% and 14%, respectively.
British Columbia, Manitoba, Quebec, and Saskatchewan all charge GST and their own respective provincial sales added, with the total combined rates ranging from 11% 14.975%.
So the same $100 purchase costs $105 in Calgary, $113 in Toronto, and $115 in Charlottetown.
Exceptions
Some things are totally exempt from sales taxes. These exemptions are either treated as zero-rated (charged 0% tax), or exempt (excluded from tax).
Products that fall into this category include basic groceries, medical things such as prescriptions, childcare, and education.
You can see the full detailed list of taxable, zero-rated, and exempt categories on the Government of Canada website.
Income Taxes
I remember when I was growing up, I would hear adults talking about taxes. Poor naive little Lex. I thought they were really just talking about the $0.15 I had paid on my $1.00 chocolate bar. Oh to be a kid!
As I grew up, I slowly learned that the taxes did not stop there. I learned that when you get a job, and agree how much you’ll be paid, you won’t exactly receive that exact amount on your paycheck! No sir, they will be deducting income taxes and making you pay your fair share, yet again.
So what is income tax in Canada? It’s the portion of your earnings that the government takes to pay for the services we all rely on. Both the federal government and your province charge income tax, and the amount you pay depends on how much you make — higher income means a higher percentage on that part of your earnings. That’s it. You earn money, a slice goes to taxes, and you take home the rest.
In Canada, your income is taxed in sections, not all at one rate. Each section of your income falls into a tax bracket, and each bracket has its own percentage. You start in the lowest bracket, and as you make more money, only the next portion of your income moves into the next bracket. These are the Federal Income Tax Brackets in 2025:
Taxable income portion | Federal tax rate applied |
Up to $57,375 | 14.5% |
$57,376 to $114,750 | 20.5% |
$114,751 to $177,882 | 26.0% |
$177,883 to $253,414 | 29.0% |
Over $253,414 | 33.0% |
This is not as complicated as it looks. Let’s go through some examples:
Example 1: $50,000 of earnings in a year
The first $50,000 falls entirely in the first bracket (up to $57,375). The tax rate on all of the income for the year in question is 14.5%. So, the total federal tax owed would be about $7,250, or 14.5% of $50,000. This amount of earnings in one year is all in the lowest bracket, so ALL the taxable income here is taxed at 14.5%.
(insert a simple visual)
Example 2: $100,000 of earnings in a year
This income touches two different brackets. Of the total $100,000, the first $57,375 is taxed at 14.5%, which is about $8,319. The xext $42,625 (from $57,376 to $100,000) is taxed at the rate of 20.5%, which is about $8,731.
So, the total federal tax owed on $100,000 in earnings in one year would be: $8,319 + $8,731 = $17,050 total.
The tax rate is not 20.5% on the whole $100k — only on the part above $57,375.
Payroll Taxes
Everyone knows about payroll taxes, because the agreed upon wage is never what you see deposited into your bank account. But do we talk about it enough? It is one of those things that has become so automatic (and obligatory!) that sometimes it seems silly to get in the weeds about it.
It is important though. Money we earn is contributed to the government. These are the literal taxpayers dollars which we hear about in anecdotes.
EI Contributions
What is EI? Short for employment insurance, is essentially Canada’s ultimate collective rainy-day fund.
EI is essentially a mandatory, nationwide insurance policy for our paycheques. If we are laid off, unable to work due to sickness, or on parental leave, EI steps in to give some contribution to our bank accounts while wages are not coming in.
Here’s how the math breaks down (2025 numbers):
How much it costs: We pay a percentage of our earnings (1.64% federally, or 1.31% if you're in Quebec since the province runs its own, separate parental leave program called QPIP).
The Limit: We only pay into it up to a maximum salary cap of $65,700. Once we hit that ceiling in a calendar year, the deductions stop entirely.
The Payoff: If we need to collect EI payments while not working, it covers up to 55% of your earnings, up to a maximum. The maximum works out to $695 per week (before any deductions).
EI has been around for close to 100 years, originally named Unemployment Insurance in 1940. Anyone who has been working regularly and paying their EI premiums (usually for the last 3-6 months as a minimum) is entitled to receive EI payments in the event they are not working and meet the eligibility criteria.
CPP Contributions
What is CPP? Short for the Canada Pension Plan, similar to EI, it is a nationwide and mandatory deduction. These deductions go towards a national pension plan, called CPP.
Unlike EI, which protects you from short-term life happenings, CPP is a longer game - it’s for retirement! You pay into it during your working years. Once you retire, you receive payments from this benefit.
Here is how the math breaks down for:
The Cost: Employees pay 5.95% on their standard earnings.
The Minimum: You don't pay anything on your first $3,500 of income—this is the basic exemption.
The Payoff: Maximum of about $1500 per month in 2026
The Quebec Exception: If you look at your pay stub in Quebec, you'll see QPP (Quebec Pension Plan) instead. It operates on identical income tiers and caps, but the base contribution rates do differ slightly because the province manages its own pension fund.
CPP is a bit more recent - it was only put in place in the mid-60s. The point of CPP was to give working Canadians a shot at better financial stability after retiring at age 65.
The reality is, however, that CPP payments will likely only act as a base, not a full retirement fund. The maximum a retiree can receive per month in 2026 is about $1500 per month, or $18,000 per year. But almost nobody gets the maximum. The average new retiree actually collects around $900-950 per month.
Property Taxes
Unlike income or payroll taxes, which tax the money flowing into your hands, property tax is a wealth tax on what you already own - specifically, real estate.
If you own a home, a condo, or a commercial building, you pay this tax annually to your local municipal government. Think of this as a subscription fee we pay to live in our neighbourhoods and access local services. It’s what funds our local schools, pays for the police and fire departments, fills potholes, and keeps the library lights on.
How does Canada compare? Property taxes are a staple of the developed world, but the execution varies.
In the U.S., property taxes are notoriously high in states like New Jersey or Texas, often making up a massive portion of state revenues because they lack federal funding structures.
In contrast, many European countries rely far less on property taxes for municipal budgets, funding local infrastructure through higher national income and consumption (VAT) taxes instead.
Sin taxes
I will be honest, I didn’t know a Sin Tax was by name until my research! What are sin taxes (I am sure there is a dad joke in there somewhere)? A "sin tax" is a specialized tax tacked onto goods or behaviors that society deems harmful, unhealthy, or costly to the public system.
The government uses these taxes for two main reasons: to discourage people from engaging in these habits by making them expensive, and to generate massive revenue to help offset the costs to society (like healthcare) associated with them.
The main ones we encounter every day include:
Tobacco/Vaping: Heavily taxed at both federal and provincial levels. A massive chunk of the price of a pack of cigarettes or vape pods is pure excise tax.
Alcohol: From beer to spirits, alcohol is subject to strict markups and specific volume-based taxes before it even hits the shelves.
Cannabis: Since legalization, legal weed comes with its own specific excise stamps and frameworks.
The New Wave (Gambling & Sugar): While traditional sin taxes focus on substances, many jurisdictions are expanding these to include things like sports betting, casino revenue, and even "sugar taxes" on carbonated soft drinks to combat obesity.
Canada has some of the highest sin taxes in the world, particularly on alcohol and tobacco. In many provinces, the government completely controls the distribution (like the SAQ or SQDC in Quebec or LCBO in Ontario), allowing them to control both the tax rate and the retail markup.
Capital Gains Tax
A capital gains tax isn't actually a separate tax at all. It is just the way the government taxes the profit you make when you sell an asset that has grown in value—like stocks, crypto, a rental property, or a cottage. This is treated as income, but not in the same way wages paid by an employer are.
The government doesn't tax the full profit/earnings. Instead, they use something called the inclusion rate. Only a specific percentage of your profit gets lumped in with your regular job income and taxed at your normal tax bracket. The rest of the profit is yours completely tax-free.
Here is how the math and rules shake out:
The 50% Rule: Canada's capital gains inclusion rate is 50%. If you buy a block of stock for $10,000 and sell it years later for $30,000, your total capital gain is $20,000. Under the 50% rule, you only add $10,000 to your taxable income for that year.
The Principal Residence Pass: There is a massive exception to this rule. If you sell the home you actually live in (your primary residence), you get the Principal Residence Exemption. That means 100% of the profit from selling your main home is entirely tax-free.
The Recent Drama: If you read the news over the last couple of years, you might remember a massive political battle over a proposed government plan to hike the inclusion rate up to 66.7% (two-thirds) for corporations and wealthy individuals. After widespread pushback and delays, that proposed tax hike was officially cancelled. The inclusion rate remains firmly at 50% across the board.
The Entrepreneur Break: To sweeten the pot for business owners, Canada features a Lifetime Capital Gains Exemption (LCGE). If you sell qualifying small business shares, or a farm/fishing property, your first $1.25 million (indexed for inflation) in profit is entirely exempt from taxes.
Canada's 50% inclusion system is actually quite unique. Down in the U.S., capital gains are completely separated from your regular income tax brackets. Instead, Americans pay distinct "Long-Term Capital Gains" tax rates (usually 15% or 20% depending on income) if they hold the asset for more than a year.
Meanwhile, some countries like Switzerland or New Zealand don't tax long-term personal capital gains on stocks at all, while parts of Europe tax them heavily at flat rates.
Import Duties
If sales taxes apply to what you buy inside Canada, import duties (tariffs) are the "cover charge" for bringing items across the border from international retailers.
The government uses them to generate revenue and protect Canadian businesses by making foreign goods artificially more expensive so you're tempted to buy local instead.
The Shopping Sweet Spot: Thanks to trade agreements, if you order something online from the U.S. or Mexico, you pay zero duty on packages worth up to $150. From anywhere else in the world, the duty-free limit drops to just $20.
The Product Lottery: Duty rates vary wildly by category. Electronics (laptops, phones) usually face a 0% duty rate. However, items like clothing or shoes can face steep duties—sometimes up to 18%—to protect domestic manufacturing.
The Surprise Fee: If a courier company holds your package hostage at the door for an extra $30, that’s a brokerage fee or handling fee. It’s not a government tax; it’s a processing fee private carriers (like UPS or FedEx) charge to clear customs paperwork for you.
So while North American trade is relatively seamless under the USMCA, we don't have a completely borderless
setup. It’s vastly different from the European Union, where goods flow effortlessly between 27 countries with zero tariffs or customs checks whatsoever.
What does the government do with all these taxes?
In the broadest sense, your taxes pay for the things you can't realistically buy on your own - the stuff that only works when everyone chips in. Healthcare, schools, roads, police, fire, the military, public transit. The safety nets for when life hits - EI when you lose your job, CPP when you retire, social assistance, support for seniors and kids.
And the boring-but-essential machinery that keeps a country running: the courts, the border, environmental and food safety, public servants, and the interest on money the government has borrowed.
Basically, taxes are the cost of living in a functioning society. You're not buying one thing - you're buying into the whole system, the same way everyone before you did.
There are lots of taxes that we as Canadians pay everyday. Know where your money is going!
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