This is a type of tax whose charge is based on the amount of another tax being paid. In Canada, there are four types of surtax: federal income, provincial/territorial income, Ontario’s wealth and the non-resident.
Federal, Provincial and Territorial Income Surtax
The federal government and most provinces/territories use a staggered tax system with individuals and joint filers paying tax based on income thresholds. Some of these government agencies, including the federal government, charge surtaxes on top of these rates.
The amount of the surtax is determined by the amount of basic income tax paid. For example, someone with $40,000 of taxable income will pay 15% of this, $6,000, to the federal government. They will also pay an additional surtax of 15% on that $6,000, or $900. The marginal tax rate, the total paid to taxes, is $6,900, or 17.25% of the filer’s income.
Deductions apply to the basic income tax, but since this decreases the amount of income tax paid, it also decreases the amount that needs to be paid for the surtax. If the person in the previous example was able to deduct $6,000 of their taxable income for child support, they would then be taxed on $34,000. That works out to $5,100 in income tax and only $765 for the surtax. That works out to a marginal rate of $5,865, or about 14.6% of the filer’s full income.
While there are some exceptions, a “non-resident” is defined as someone who was in Canada for less than 183 days that tax year and didn’t emigrate to Canada or immigrate to another country. Since people in this situation don’t have an established province or territory of residency, they pay a 48% federal surtax to the Canada Revenue Agency in place of province/territory taxes. All federal taxes for non-residents only account income earned in Canada or from the sale of taxable property in Canada.
Usually, people moving into or out of the country must pay this surtax up front, then claim a refund after their emigration paperwork goes through.
Ontario’s Wealth Surtax
Starting July 1, 2012, a new tax came into effect for individuals and joint filers in Ontario earning over $500,000. Originally planned to help defer a planned reduction in heating oil tax, it finally passed as part of a plan to balance the budget; politicians promise this tax will be repealed once the budget is balanced sometime during the 2017-2018 fiscal year.
Although widely referred to as a “surtax,” it is merely a new tax bracket. Before, the highest tax bracket topped out at a rate of 11.6% for Ontario residents, but those who earn enough to fall into the new bracket, set at $509,000 and above for the 2013 tax year, must pay 13.6% in income tax.