Tax on Salary in Canada: What It Means for Indians Working There

Who Must Pay Tax on Salary in Canada?

Under Section 2 of the Income Tax Act, all Canadian residents are taxed on their worldwide income, which includes employment income earned in India. Non-residents, on the other hand, are taxed only on Canadian-source income such as salary received for work done in Canada.

Residency for tax purposes is determined based on various factors, including physical presence (more than 183 days in a tax year), availability of residential ties (home, spouse, dependents), and intentions to settle in Canada. Many Indians working in Canada on work permits, student visas, or PR cards are treated as tax residents and are liable to pay income tax on global income.

What Is Considered Salary Under Canadian Tax Law?

Sections 5 and 6 of the Income Tax Act define salary or employment income as all forms of compensation received in the course of employment. This includes:

• Regular wages and salary

• Bonuses, commissions, and honoraria

• Allowances (housing, transport, etc.)

• Non-cash benefits (employer-paid health insurance, company vehicles, rent-free housing)

Even employer-provided perks are taxable unless explicitly exempted. For example, if an Indian tech worker receives stock options or housing as part of a relocation package to Toronto, these benefits are usually considered taxable.

How Salary Tax Is Calculated in Canada

Canada uses a progressive tax system with separate federal and provincial rates.

Federal Tax Rates for 2025 (including mid-year cut):

• 14.5% on the first $57,375 (reduced from 15% as of July 1, 2025)

• 20.5% on $57,375 – $114,750

• 26% on $114,750 – $177,882

• 29% on $177,882 – $253,414

• 33% on income above $253,414

Provincial Tax Rates:

These vary by province. For example:

• British Columbia: 5.06% up to $49,279; progressively increases up to 20.5%

• Ontario: 5.05% up to $52,886; increases up to 13.16% on higher brackets

Additional Payroll Contributions:

• Canada Pension Plan (CPP): 5.95% of salary (up to annual maximum), plus an additional 4% on higher income under new rules

• Employment Insurance (EI): 1.64% of salary (subject to a cap)

Overall, salary earners—especially in mid- to high-income brackets—may see total deductions (income tax + CPP + EI) ranging from 25% to 35% of their gross salary.

Tax Obligations for Indians Working in Canada

Indians working in Canada fall under one of two broad categories:

1. Tax Residents (e.g. PR holders, long-term workers)

They must report global income, including salary from Indian employers or freelance earnings in India. This global income is taxed by Canada, but double taxation is avoided via the India–Canada Double Taxation Avoidance Agreement (DTAA). If Indian taxes have been paid on that income, the taxpayer can claim a foreign tax credit in Canada.

2. Non-Residents (e.g. short-term consultants)

They pay Canadian tax only on salary earned in Canada. If the employment contract is short-term and Indian tax is already paid, it may be exempt under treaty provisions. However, such workers may need to file special forms with the CRA to reduce or eliminate Canadian withholding tax.

Real-World Example: Indian Worker in Canada

Consider an Indian software engineer who moves to Canada on a work permit and earns CAD 100,000 per year, with CAD 6,000 passive income from freelance projects in India.

• As a Canadian tax resident, the total CAD 106,000 would be taxed in Canada.

• The Indian income (CAD 6,000) would also be taxed in India, but tax paid there would be credited against Canadian taxes.

• Final tax liability would depend on provincial location and applicable deductions (RRSPs, union dues, etc.).

How the Law Enforces Compliance?

The Canada Revenue Agency (CRA) is empowered under Section 239 of the Income Tax Act to impose strict penalties for non-compliance. Penalties include:

• Fines of up to CAD 25,000 for late or false filings

• Criminal prosecution in extreme cases

• Interest on unpaid tax

• Mandatory foreign asset disclosures via Form T1135 for assets over CAD 100,000 abroad

Recent Changes: July 2025 Tax Cut and DTAA Relevance

In a major policy shift, Canada’s government reduced the lowest federal tax rate to 14% (effective mid-year 2025). This provides direct tax relief to over 22 million workers, including thousands of Indian professionals. The average salaried employee could see a reduction in annual taxes between CAD 420–840, depending on income level and marital status.

At the same time, CRA continues to enforce the India–Canada DTAA carefully. Indians working in Canada must maintain income records from India, seek TDS certificates, and accurately claim foreign tax credits to avoid penalties or over-taxation.

Understanding Salary Taxation in Canada: Law, Rates, and Implications for Indians Working Abroad

Canada’s income tax system is progressive, comprehensive, and based on legal principles codified in the Income Tax Act (RSC 1985). All individuals earning income from employment in Canada, including foreign nationals such as Indians working there, are subject to its provisions. In contrast, India follows its own taxation model under the Income-tax Act, 1961, offering two alternative regimes. As global mobility increases, comparing these two systems becomes essential for Indian professionals seeking overseas opportunities.

Legal Framework and Tax Applicability

Canada taxes its residents on their global income. This includes all forms of employment income, whether earned in Canada or abroad. Non-residents are taxed only on their Canada-sourced income, such as salary paid by Canadian employers.

India, on the other hand, taxes income based on residency and source. Residents are taxed on global income, while non-residents are taxed only on income sourced in India. From FY 2023–24, India has adopted a default "new tax regime"offering lower tax rates but limited exemptions, alongside the old regime, which allows deductions but imposes higher rates.

What Counts as Salary Income

Under Section 5 and 6 of Canada’s Income Tax Act, employment income includes:

• Wages and salaries

• Commissions, bonuses, and tips

• Allowances for housing, transportation, etc.

• Non-cash benefits such as employer-provided housing or vehicles

In India, salary income includes similar components and is detailed under Section 17 of the Income-tax Act, 1961, with several exemptions like HRA, LTA, and standard deduction available under the old regime.

Income Tax Rates on Salary: Canada vs. India (FY 2025–26)

Canada

Federal tax rates (2025):

• 14.5% on income up to CAD 57,375 (rate reduced mid-2025)

• 20.5% on income from CAD 57,376 to CAD 114,750

• 26% from CAD 114,751 to CAD 177,882

• 29% from CAD 177,883 to CAD 253,414

• 33% above CAD 253,414

Provincial taxes are added on top:

• British Columbia: 5.06% up to CAD 49,279 (progressively increasing)

• Ontario: 5.05% up to CAD 52,886, rising in tiers

Payroll deductions:

• Canada Pension Plan (CPP): 5.95%, plus 4% on income above CAD 71,300

• Employment Insurance (EI): 1.64% (capped)

Combined, total salary deductions typically range from 25% to 35% depending on income and province.

India (New Regime)

Income Tax Slabs for FY 2025–26 (excluding cess and surcharge):

• Up to ₹4 lakh: Nil

• ₹4 – ₹8 lakh: 5%

• ₹8 – ₹12 lakh: 10%

• ₹12 – ₹16 lakh: 15%

• ₹16 – ₹20 lakh: 20%

• ₹20 – ₹24 lakh: 25%

• Above ₹24 lakh: 30%

Standard deduction: ₹75,000 (from FY 2025–26)

Section 87A rebate: Full rebate of ₹60,000 for income up to ₹12 lakh, effectively making incomes up to ₹12.75 lakh tax-free.

India’s old regime allows deductions like ₹1.5 lakh under Section 80C, HRA, LTA, etc., but at slightly higher tax rates.

Tax Compliance and Double Taxation Relief

Indians working in Canada and qualifying as Canadian residents are taxed on their worldwide income, including any income earned or received in India. However, the India–Canada Double Taxation Avoidance Agreement (DTAA)ensures that:

• Tax paid in India is available as a foreign tax credit in Canada.

• Double taxation is avoided through offsetting mechanisms.

Canada requires disclosure of foreign income and assets (Form T1135) if they exceed CAD 100,000. Late or false filings may attract penalties up to CAD 25,000 or more, as per Section 239 of the Income Tax Act.

Example Comparison: Indian vs. Canadian Taxpayer

1. Indian worker earning ₹20 lakh in India (new regime)

• Tax: ₹2.08 lakh + cess = approx. ₹2.16 lakh

• Effective tax rate: ~10.8%

2. Indian professional earning CAD 100,000 in Canada (Ontario)

• Federal tax: ~CAD 14,000

• Provincial tax: ~CAD 6,000

• CPP and EI: ~CAD 6,000

• Total deductions: ~CAD 26,000

• Effective tax rate: ~26%

3. Indian worker in Canada with ₹5 lakh freelance income in India

• Canadian resident: full ₹5 lakh added to Canadian income

• Indian tax paid can be claimed as credit under DTAA

Summary of Key Differences

Conclusion

Canadian law is clear: employment income—whether earned in Canada or elsewhere—is subject to tax for Canadian residents, with deductions and credits available to ease the burden. Indians working in Canada must pay income tax according to their residency status, with total effective deductions often ranging from 25% to 35% of their salary.

However, through the India–Canada DTAA, and with proper planning and accurate filing, tax obligations can be optimized. Indians in Canada are encouraged to maintain detailed records, understand residency definitions, and consult qualified tax advisors to navigate the complex but manageable system.