Canadians would be wise to get to know a little bit about their taxation system, as the nation allows for all kinds of income and provides a hefty tax code that offers us many, many ways to reduce our Taxable income if we wish.
I imagine that's why you've landed here, though, which is great. This article will explain a bunch of tips, tricks, and knowledge about the Canadian tax system.
I personally have always used an accountant for these matters as I believe they know best, especially for unique situations involving corporations and assets etc. Many people also use programs available to do their own taxes and save the seemingly fast-growing fees from the accountant.
What is the Minimum Income to Pay Taxes in Canada?
For 2024, the amount of income an individual can earn before any federal tax is payable, known as the "basic personal amount," has been set at $15,705.
What Does "Basic Personal Amount" Mean?
As per the Government of Canada's website:
"The basic personal amount (BPA) is a non-refundable tax Credit that all individuals can claim. The purpose of the BPA is to provide a full reduction from federal income tax to all individuals with taxable income below the BPA. It also provides a partial reduction to taxpayers with taxable income above the BPA.
A non-refundable tax credit reduces what you may owe. However, if your total non-refundable tax credits are more than what you owe, you will not get a refund for the difference."
How the Basic Personal Amount Works
Everyone is entitled to claim the basic personal amount, which serves as a non-refundable tax credit, offsetting a portion of what they owe. Keep in mind, too, that there might be additional provincial or territorial taxes that could apply depending on your place of residence within Canada.
These taxes are separate from federal income taxes and have their own set of thresholds and rates, so make sure you consider ALL the variables when doing your taxes. We dig further into this below!
How the Canadian Tax System Works
The tax system in Canada operates under a progressive structure, meaning that as an individual's income increases, so does the percentage rate at which they are taxed.
However, don't make the mistake that many do and believe if you earn $1 more than the threshold, your entire salary is taxed at a higher rate. It's only money you earn over and above that threshold that is taxed at the higher amount.
For example, if we use hypothetical numbers and say you're taxed 15% on anything under $100,000 and 25% on anything over $100,000 and you make $100,001, you are only taxed 25% on one dollar in earnings.
Why it may still be advisable to File a Tax Return Even if You Don't Work
Everyone should file a tax return, even if they make no money, and there are reasons for this:
- Basic Personal Amount: Every Canadian resident is entitled to claim the basic personal amount, a non-refundable tax credit which reduces the amount of tax one owes.
- Refundable Tax Credits: Certain tax credits, such as the GST/HST credit or the Canada Workers Benefit, are refundable. This means an individual could receive a refund or credit even if they have no tax owing.
- Carry-Forward Amounts: In some cases, losses or deductions that cannot be used in a year due to low income can be carried forward to future years. Filing a return is necessary to establish eligibility for these carry-forward amounts.
You want this history as it can sometimes play into your favour in later years, and just in general, having a tax history can make your life a bit easier sometimes, the same way having an income history or credit history can.
Even if one's income is below $10,000, there may still be provincial or territorial taxes applicable, though these are often low for such income levels. Moreover, filing a return ensures individuals receive any benefits and credits they are eligible for.
It should be noted that certain situations require a tax return regardless of income level:
- A person has to pay minimum tax.
- They have to repay part of their Old Age Security or Employment Insurance benefits.
Let's Talk About Taxable Income and Deductions in Canada
What is Taxable Income?
Taxable income is the sum of an individual's earnings that is subject to tax after all applicable deductions are accounted for.
Taxable income is a part of life in Canada, and the tax could be looked at as really more of a blessing than a curse. Given our system, if you have a considerable taxable income, you are probably doing quite well for yourself, and that is fantastic.
If you owe, then it's time to get all your ducks in a row and figure out how to reduce your taxable income to the lowest amount possible if you wish.
The reality is our tax system does help pay for services and development. Some people believe in paying more taxes, and some people believe the system is abused by politicians and the money is wasted.
Wherever you form your opinions is fine with us. For this article, we will talk more about reducing taxable income where possible, as that is what most people aim to do if they can.
Calculating taxable income:
- The sum of all gross income sources.
- Subtract allowable deductions such as but not limited to:
- Registered Retirement Savings Plan (RRSP) contributions
- Union and professional dues
- Childcare expenses
The resulting amount is the taxable income, which serves as the basis for the calculation of income tax owed.
Your taxable income will put you into a particular bracket
Taxable income is categorized into federal "brackets," with higher rates applied as income increases. One's marginal tax rate depends on which bracket their income falls into after all deductions and credits are applied.
This method helps to ensure a progressive tax system where those with higher income contribute a proportionately larger amount in taxes.
Federal Tax Brackets for 2024 via the Government of Canada website:
- Portion of taxable income that is $55,867 or less: 15%, plus...
- Portion of taxable income over $55,867 up to $111,733: 20.5%, plus...
- Portion of taxable income over $111,733 up to $173,205: 26%, plus...
- Portion of taxable income over $173,205 up to $246,752: 29%, plus...
- Portion of taxable income over $246,752: 33%
Keep in mind that this information is specific to federal taxes, and each province or territory may have additional guidelines and thresholds.
For a detailed breakdown of the figures for different years, you may find it beneficial to visit Canada's income tax brackets for 2024.
What are Tax Deductions and Credits?
Canadian taxpayers can reduce their taxable income through various deductions and non-refundable tax credits. These not only lower taxable income but can also reduce the tax bill directly.
Deductions could include but are certainly not limited to:
- Contributions to RRSPs
- Moving expenses for eligible relocation
- Business investment loss
Non-refundable tax credits include:
- A basic personal amount, which is a federal tax credit available to all Canadian taxpayers
- Credits for charitable donations
- Medical expenses exceeding a certain threshold
Tips on Maximizing Tax Savings Through Deductions and Credits
RRSPs for Canadians
Registered Retirement Savings Plans (RRSPs) are crucial for Canadians aiming to reduce their taxable income. RRSP contributions directly reduce an individual's gross income, thus lowering the overall tax burden.
The maximum contribution limit is 18% of the individual's earned income from the previous year, up to a limit set annually by the Canada Revenue Agency (CRA). Contributions to an RRSP can be deducted from income—reducing the immediate tax owed and potentially resulting in a tax refund.
Leveraging Tax Credits and Benefits
On the other side, tax credits can provide tax relief by reducing federal income tax owed. Non-refundable tax credits lower the total tax bill and only benefit the taxpayer if they have taxes payable.
Meanwhile, refundable tax credits, like the Canada Child Benefit, can result in a refund. These credits apply to a wide range of situations, including:
- Child Care Expenses: Allowances for deducting a portion of the costs associated with child care, which can lead to considerable savings.
- Government Benefits: Various federal benefits, such as the Guaranteed Income Supplement (GIS), may be non-taxable, allowing lower-income seniors to increase their after-tax income.
- Canada Training Credit: A refundable tax credit that helps cover up to 50% of eligible tuition and fees for training and education.
- Investment Tax Credit: Encourages investment by offering credits for certain types of investment, helping to reduce the overall tax due.
There are way too many tax deductions to highlight in this article. In fact, I could probably make an entire article just listing 10% of them. So, for this reason, it's important you reach out to an accountant to figure out what you can deduct.
Things You Will Need to Consider in Calculating Your Income Taxes
Federal Income Tax Rates
The Canada Revenue Agency sets federal tax rates that are applied progressively across different income levels, known as tax brackets.
For 2024, as listed above, these rates start at 15% for the lowest-income earners and increase to higher percentages for income above certain thresholds.
Provincial/Territorial Tax Considerations
It can make a sizeable difference where you choose to live in Canada in terms of how your income is handled. Alberta has been known as a haven for folks who wish to pay less tax if they can put up with the bald, windy prairie.
Whereas if you want to live somewhere like British Columbia or Quebec, the scenery can be nice, but finding yourself on the inside of those borders can certainly be "taxing" when it comes to your taxable income.
Each province and territory in Canada also imposes its own tax rates and brackets, which are added to the federal tax to determine one's total tax liability.
Provincial and territorial tax rates vary significantly, hence why residents must calculate both federal and provincial/territorial taxes to determine their full tax responsibility. Some provinces have a single-rate system, while others, like Ontario and Quebec, have multiple brackets similar to the federal system.
For instance, British Columbia has several tax brackets starting at 5.06% and reaching up to 20.5% for income over a designated threshold. Conversely, provinces like Alberta apply a flat rate (10% for 2023) on all taxable income.
Provincial and territorial rates and brackets can be found on respective government or financial advisory websites and are essential for taxpayers in those jurisdictions.
What About Minimum Tax?
A minimum tax is a provision that ensures individuals who benefit from certain preferential tax treatments still pay at least a minimum amount of tax. It comes into play when these deductions and credits bring one's tax owed below the minimum threshold.
Taxpayers may need to complete specific forms, such as Form T691, to determine if they are subject to this tax. With the regulations subject to change, remaining informed about these thresholds is essential for compliance and effective tax management in Canada.
Don't rely on this article. Instead, check the Canada Revenue Agencies website.
Complex Tax Situations to Watch Out for
Dealing with Capital Gains and Investments
When individuals sell an investment for more than they paid, they realize a capital gain, which is subject to taxation. However, only 50% of the capital gain is included in an individual's net income for tax purposes, impacting their marginal tax rate.
Investments in resource properties can also have tax implications. Should the sale of these assets result in a gain, applicable rules must be followed to calculate the capital gain and corresponding tax.
Complex situations may also arise from minimum tax considerations, which ensure that taxpayers pay at least a minimum amount of tax, regardless of deductions and credits.
Tax Implications of Self-Employment and Side Jobs
Self-employment income and earnings from side gigs must be reported along with other personal income. It's essential for taxpayers to not only report this income but also understand that it can change their tax bracket, potentially leading to a higher marginal tax rate.
Self-employed individuals and those with side jobs can deduct certain expenses directly related to earning their business income, effectively lowering their taxable income.
For instance, a freelance graphic designer can deduct expenses such as software subscriptions or a portion of home office expenses. Similarly, someone with a profitable side gig must also consider self-employment taxes, which include contributions to the Canada Pension Plan (CPP) on their net income from the side job.
Keeping accurate records and understanding the deductions available are key aspects of navigating these tax implications.
Did you Know not all Income is Taxable?
In Canada, certain types of income are not subject to taxation. Individuals may be relieved to know that they do not have to report every penny of their earnings to the Canada Revenue Agency (CRA). There are specific forms of income that fall outside the scope of taxable income.
Here are a few items that are not taxable. Keep in mind this is far from all of them:
Gifts and Inheritances: Generally, cash gifts and inheritances received in Canada are not taxable. However, that income is taxable if the gift generates income, such as interest or dividends.
Lottery Winnings: If someone is lucky enough to win the lottery, those winnings are theirs to keep without having to pay taxes on them. But hey, share the wealth.
TFSA Withdrawals: Investments within Tax-Free Savings Accounts (TFSA) grow tax-free. Withdrawals from a TFSA are also not taxed.
Child Support: As of May 1, 1997, child support payments are not taxable for the recipient and are not deductible for the payer.
Certain Social Benefits: Social assistance payments and most provincial and territorial benefits do not count as taxable income.
Sale of Primary Residence: The profit made from the sale of a primary residence is typically not taxed due to the Principal Residence Exemption.
