In Canada, every person is required to file a personal tax return. If you are a student, you may want to file a personal tax return if you have a part-time job or go to college, university or a trade school. Or if you are not a student and turning 19, you may want to file a personal tax return to receive benefits from the government (i.e. GST or PST credit)
What this means is that at some point in your life, you will HAVE to file a personal tax return so EVERYONE should have a general understanding of taxes.
Yes, I hear you…it gets really confusing when phrases like “total income”, “net income”, “taxable income”, “tiered tax rates”, “deductions”, “credits”, “benefits”, and more are thrown around in general discussions with CRA, friends and family. It also gets confusing when a benefit is called a credit and vice versa.
So let me help you understand some of the basics.
Since we all like making money, let’s start with income.
TOTAL INCOME— this is the total amount you are paid before anything is deducted from it. For example, if you have a job and you are paid $60,000 per year, the $60,000 is your total income. Your employer would then deduct things like Canada Pension Plan (CPP), Employment Insurance (EI), tax, RRSP contributions, health and life insurance premiums. But regardless of the items deducted from your salary, your total income is $60,000. This is the same for taxpayers receiving pension income or other types of income, like spousal support.
Where there is a difference for total income is when you report business, rental, farming or fishing income. Under these scenarios, your total income is the amount reported after your direct expenses related to those activities.
NET INCOME—this is your total income after certain deductions. These might include RRSP contributions, child care, spousal support payments, union dues, moving expenses and more. Once we deduct these items, you have your total net income.
3. TAXABLE INCOME—this is your net income after certain deductions. These might include capital losses from prior years, northern residents deductions, workers compensation benefits (WCB) payments or social assistance payments and more.
I recognize that net income and taxable income both have deductions and although they are different types of deductions to determine those amounts, to keep this explanation as simple as possible, let’s ignore why there are two categories of deductions.
Deductions, credits and benefits are often tangled as well. Deductions are different than credits; credits are different than benefits.
DEDUCTIONS are offset dollar for dollar in determining your net or taxable income. Some deductions have maximum thresholds (i.e. childcare is $5,000/$8,000 per year depending on the age of your child) while others have no maximum.
Once we have determined your taxable income, your taxes can be calculated. You often hear people mention tax rates such as 25% or 40%. In Canada, we pay both Federal and Provincial taxes using a tiered tax rate system (some provinces may have flat tax rates).
Let’s not confuse this type of tax with CPP or EI. CPP is your contribution to the Canada Pension Plan when you retire and EI is your insurance premium for if you get laid off, maternity or parental lave, and/or medical leave.
The tiered tax rates, federally and provincially, change every year. The tax brackets also change each year. So when you hear that someone is in the 25% or 40% tax bracket, that doesn’t mean that all their income is taxed at that rate.
Tiered means that the taxable income is taxed at the various rates; first, second, third or higher brackets…each tier or bracket used will be determined by their total taxable income. The Federal and BC brackets and rates for 2015 are on the previous page.
Before we determine what your total federal and provincial taxes are, we get to add in the tax CREDITS. Similar to tax rates and brackets, the tax credits also change each year. Some credits we have had for many years while others come and go. Typical federal credits include:
- Basic credit (every tax filer is eligible to claim this)
- Spouse credit (if your spouse has little to no income, you can claim the difference that your spouse did not claim)
- Age credit
- Fitness & arts credit
- Disability tax credit
- Pension credit
- Public transit credit
- Tuition & education credit
- Home buyers amount credit
- Canada employment amount credit
- Medical credit
Each of these credits have a value. Some are a set dollar amount while others are tied to the amount spent. Some of these credits also increase with inflation or change with Federal and Provincial Budgets. As mentioned, the above credits are Federal. Each province has their own credits. Not all provinces have the same credits nor do they use the same values. i.e. Both Federal and BC have a basic credit but these amounts are not the same.
Once all your federal and provincial credits are determined, they are totalled. The tax rate for the first bracket is then applied against this total. i.e. Federal tax rate on the first tier is 15% so if your total federal credits are $10,000, your tax credits would save you Federal taxes of $1,500; Provincial tax rate is 5.06% so if your total credits are $10,000, your provincial tax credits would save you Provincial taxes of $506.
Now that your taxes are understand, we get into the tax BENEFITS.
There are lots of tax benefits. The most common ones are GST Credit and Child Tax Benefits (CTB). The CTB has both a federal and provincial portion which are based on your income. If your family income is too high, you will not receive either the Federal or Provincial portion of the CTB. The GST Credit (which is really a benefit) is also based on your income and received 4 times a year. Other benefits may include PST Credit (depending on your province) and working income tax benefit; both of these are claimed on your personal tax return and are refunded or offset against your personal taxes owing. These benefits are generally not taxable although there are some, like the Universal Child Care Benefit (UCCB), which is taxable. (For more information on the UCCB, refer to my Special Tax Update from July 2015.)
As always, if you need help or guidance, speak with a Professional Accountant. We are always here to help you!
**This blog is for information only and not to be used as tax advice or planning without first seeking professional advice. Information is subject to change without notice.