Benjamin Franklin once said, “In this world, nothing is for certain except for death and taxes.”
Taxes are a subject that none of us want to talk about, but with these tips, we can get through it together.
How does Canada’s graduated income tax system work?
In Canada, we have a graduated income tax system, which means that the more money you earn, the more taxes you pay.
Income taxes consist of two parts: the federal tax, which is the same for everyone, and the provincial tax, which depends on where you live.
To determine the taxes you would be paying on your income at different levels and brackets, you can use the marginal tax rate.
At the lowest income level or bracket, you pay $0 in taxes because your income is below what’s called the “personal amount.”
Think of a high school student working a part-time job and making less than $11,000 per year.
For 2018, in British Columbia, a combined marginal tax rate for federal and provincial taxes is just above 20 percent. That means, for every dollar this high school student earns above the personal amount, they have to pay 20 cents to the Canada Revenue Agency in tax. That tax rate is applied until their income climbs up to the next income bracket, where a new tax rate for their new bracket is then applied.
The highest combined federal and provincial tax rate in British Columbia is currently 49.8 percent for those in an income bracket of over $200,000 per year.
However, there are a few different methods we can use to offset the taxes we pay as our income grows.
For my latest video, I interview Jan Mark, a reputable CPA with Mark & Tsang Chartered Professional Accountants, to hear her tax preparation tips. Read Jan’s advice below, and watch the video for the full interview.
What are some common tax preparation mistakes that you see?
One of the most common mistakes is in regards to foreign asset reporting. Most people are just confused about what that means, and when to report it. Basically, if your foreign asset is costing you more than $100,000, you will have to report it. Foreign assets that you own outside of Canada, such as a bank account or vacation property, will have to be reported.
What is the difference between a tax deduction and a tax credit?
A tax deduction is a reduction against taxable income. The amount of savings that you receive will depend on your personal marginal tax rate. For example, a $1,000 deduction with a 30 percent margin, will give you $300 in tax savings.
A tax credit, on the other hand, is a dollar-for-dollar reduction against the tax liability you owe. For example, if you receive a $1,000 tax credit, you will get the $1,000 directly against the tax that you owe.
Is there a “superhero” tax credit?
Yes! Charitable donations in Canada give you a pretty good tax credit. For any donations you make to charitable organizations, for the first $200, the credit you get will be for the lowest marginal rate. Anything after that will be for the highest marginal rate; for 2018, that’s close to 50 percent. For example, if you make $1,000 in donations, the amount you will receive in tax credits will be around $400.
What is the typical tax deduction available for employees?
For employees, the tax deduction is quite limited. The most typical deduction is for an RRSP or the Registered Retirement Savings Program.
Due to the restrictions in having an RRSP, what would be an optimal income level for one to start at?
It depends on the individual’s tax situation and on the retirement tax rate at the retirement age. It also depends on the individual’s discipline to save or not. RRSP is a program put in place by the government to defer your current income and pay tax into the future. In my opinion, any time you have the opportunity to defer tax, you should.
You can learn more about RRSP in our last video!
How else can we take advantage of tax deductions?
The tax deduction for employees is limited. But if you’re self-employed, a lot more deductions are available to offset against the business income. For example, any rent or upgrades to your business space or home office, wages paid to your employees, office supplies, transportation costs, or even meal you took your clients to, are all deductible against your business income.
A big thanks to Jan from Mark & Tsang Chartered Professional Accountants for joining us in my latest video to provide insight on how to prepare our taxes effectively. If you have further questions for Jan, you can set up a consultation with her at firstname.lastname@example.org and she’ll work to find the best solution for you.
Don’t be discouraged by our tax system. In future videos, we will continue to expand on how we can best manage (and minimize!) our taxes so you can keep more of what you make.
Thank you for reading along in my latest post. I hope these tax tips are helpful for you as you file your taxes this year, and if you have questions regarding your finances for the future, I’d love to help!