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CANADIAN TAX: Basics to Paying Less with Jan Mark, CPA

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Benjamin Franklin once said, “In this world, nothing is for certain except for death and taxes.”

In a previous video, we talked about being financially prepared in the event of a death, but in my latest Street Smarts with Taayla episode, we’ll talk some Canadian tax basics.

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 [email protected] 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!

Please like and share my videos, it lets me know when I’m doing things right! If you have not subscribed to my channel, please do so now and I will bring more segments and topics to you each month.

RRSP

Is RRSP right for YOU?

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Are you thinking about your retirement and wondering if an RRSP is right for you? In the latest Street Smarts with Taayla video, we’ll dig deeper into this question and find a solution that works for you.

What is an RRSP?

If you’re unfamiliar with or new to RRSPs, you’re not alone! An RRSP, or Registered Retirement Savings Plan, is one of the most commonly misunderstood types of investment accounts.

My clients will ask me if an RRSP is right for them, and as much as I’d like to give a simple “yes” or “no,” I usually tell them it depends — because it does!

How to know if an RRSP is right for you

Before I can know if an RRSP is the right choice for you, I need to know five key things about you: your age, income, first home, education, and emergency funds.

When to take advantage of RRSP savings

An RRSP can be an excellent tax savings and a great way to save for retirement. However, if you’re under the age of 30, chances are you’re not at an income state where you can best take advantage of the RRSP savings.

Why?

Because when you make less money, you’re also paying little to no income taxes. If you wait until your earning increases before you contribute to your RRSP, then the potential to save on your taxes could be higher than they are now.

While I don’t usually recommended having an RRSP for incomes under $50,000, if you do decide to contribute to one, you don’t have to claim the plan on your taxes for the current year — you can carry it forward indefinitely.

For example, if your income is $20,000 today, and you believe your income will continue to increase over time, then start saving in your RRSP today. Just make sure to wait until you are at a higher marginal tax rate before you apply your RRSP against your income, whether that’s next year or somewhere down the road.

How to use an RRSP to reach your goals

In my previous video on RRSPs, I talk about how you could use your RRSP toward the down-payment of your first home, or toward the cost of a full-time education. While RRSPs are an investment account for your retirement, there are many benefits to utilizing your RRSP sooner rather than later.

If you’re looking to buy your first home, or want to pursue higher education, then go back and watch how RRSP can help you achieve these goals.

When to prioritize an RRSP

The last thing to consider when deciding if an RRSP is right for you, is the status of your emergency fund. If you have little to no emergency fund, then establishing a solid fund should be your first priority!

Fill your emergency fund before your RRSP, because an RRSP cannot protect you quite like an emergency fund can. While you can withdraw money from your RRSP, there are tax consequences for doing so.

I recommend to my clients to keep an emergency fund worth at least three months of their salary — ideally six months.

Let’s think about this scenario: you have accumulated $30,000 in your RRSP and now you have an emergency where you need cash quickly. You decide to take out the $30,000, but what you don’t realize is that when you do that, 30 percent is being withheld. Now you only have $21,000 you can use!

You would then have to include the $30,000 withdrawal from your RRSP in your income taxes for the year. So if your standard income for the year was, say, $50,000, and you added the $30,000 to that, your income tax return would then be based off $80,000 — a much higher marginal tax rate.

RRSPs are meant to be withdrawn from strategically, and in emergency, you don’t have time to plan for that.

Thank you for reading along in my latest post. I hope this dive into RRSPs has been helpful in allowing you to decide whether or not an RRSP is right for you.

Ask me questions in the comments section below, and let me know what other savings vehicle you are using for your retirement. I’d love to learn more!

Please like and share my videos, it let’s me know when I’m doing things right! If you have not subscribed to my channel, please do so now so I can get more segments and topics to you each month.

A Mission Statement: Defining YOU

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Our finances can define who we are, but in the latest two-part Street Smarts with Taayla video, we’ll show you how you can use a personal mission statement to determine for yourself who you want to be.

Right now, you’re at the beginning of a journey, a journey to who you want to become.

If your future self is the destination, think of a mission statement as the map to guide you there. A mission statement, much like a roadmap, helps you, and others, determine how you will achieve your goals and make it to where you want to go.

You’ve no doubt seen businesses and organizations use statements of purpose to communicate what it is that they do, and you’ve probably felt moved by some, and turned off by others. However, a well-written mission is more than just the clever marketing of a successful business, it’s the key to individual success as well.

Only you can define who you are, and by taking the time to carefully do so, you’ll come out ahead feeling ready to grow and succeed.

A personal mission statement is a critical step in achieving future success.

Mission statements help you understand who you are, where you’re going and why you’re going there. By imagining your path to personal growth before you begin your journey, you can create a plan that is clear and effective. This visualization will help you make critical assessments of where you are now and where you want to be, and ideally, provide the roadmap to do so.

Pick up a pen and ask yourself: What’s my story? Who am I as a child, parent, or friend? How do I want to be remembered? What will be my legacy?

While these questions for self-reflection may seem big or vague, oftentimes, we already know their answers. Write them down without doubt and judgment, however they flow through your mind.  The things we like to do, the people we like to spend time with — thoughts like these guide the mission statement-writing process.

As you continue planning the map of your vision, choose a couple trustworthy people in your life and ask them for an opportunity to provide you with honest feedback about yourself, your values, and your ambitions.

Find the recurring themes between their insights and yours, and use this to create a rough draft of your mission statement. Try to be concise in the message you want to convey, and write this future self in the present tense. It doesn’t have to be in a certain format for now; the focus of this exercise is to learn more about yourself so you can create the foundation for defining you.

Enjoy getting to know yourself, and celebrate your unique path.

I would love to learn more about you, so please feel free to use the comment section below to share with us your mission statement-writing experiences.

Thank you for reading along. Please like and share these videos, and subscribe to our channel: Engrace Financial Solutions — financial success made simple.

Critical Illness for Families with Children

Financial Planning: Critical Illness for Families with Children

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In the latest Street Smarts with Taayla video, I’m discussing the ways you can take preventative measures to protect your family in the instance that your child falls ill with a critical illness. Parents will do everything they can to protect their children from harm. But most times, that doesn’t include envisioning a future where their child falls critically ill. While this is an uncomfortable topic, it’s an important one, as the repercussions of a critical illness can significantly impact your family in many ways.  

The Impact of Critical Illness

It’s hard enough to imagine ourselves in this situation, so how can we even entertain the idea that it could happen to our children? When I talk to parents about critical illness insurance for their young ones, they don’t usually see the need for it. However, with over 900 new cases of children being diagnosed with cancer each year, I believe it is important to help families prepare for the worst case scenario.

Some of the challenges that can result in financial stress include:

  • Alternative medicines that can add up to hundreds of dollars each month.
  • The need to hire extra help to help around the home.
  • Loss of income revenue or the ability to work due to emotional or psychological distractions.
  • Having to take time of work to be with your child at home, or in the hospital.
  • Putting retirement or travel savings plans on hold to pay for medical expenses.

Consider Critical Illness Insurance for the Family

The emotional and financial strain for families with sick children can go beyond a few months into years of hardship. This is why I urge parents who have coverage for themselves to consider getting critical illness insurance for the rest of the family. Critical illness insurance for your children is valid for the rest of their lives, even as grown-ups. While it may not lessen the heartache of the situation, a critical illness insurance plan can help parents focus on what’s most important – the health of your child.

Thank you for trusting me to speak on this difficult subject and I hope that you are encouraged to make the best decision for your family; to cover all your bases and focus on living an excellent, secure life!

I’d love to hear your feedback, or if you have a similar story, please share with us in the comments below! I will do my best to help support you through it. Please like and share this video, and subscribe to our channel: Engrace Financial Solutions, financial success made simple.