Monday, September 18, 2017
Our Tax System Explained
Benjamin Franklin once said, “In this world, nothing can be said to be certain, except death and taxes.” Sadly this grim outlook has been proven to be true time and time again. Taxes can be confusing, frustrating, and downright mysterious. Most people throw in the white towel and settle for, “Just give me what’s left.” Others circumvent the system and go out of their way to pay as little as possible, sometimes dodging the law in the process. I have taken the Franklin route of submission knowing that taxes are inevitable. Efficiency is what’s key in my mind. I do understand the government needs money to function, but it is my aim to give them only exactly what they deserve from me. This week at Budget Boss will aim to demystify taxes for the average person. We are going to speak to efficiency, deductions, CPP, tax-efficient vehicles and other topics that will help you on your path to financial freedom. For many people, our tax system in Canada can be confusing. For this reason, we are starting off the week by explaining how our tax system works and what it means to you. Something as basic as knowing how much you are being taxed and why is invaluable, so let’s jump into a little Canadian Taxes 101.
Canada has a Progressive Tax System
What does that even mean? A progressive tax system is just a fancy way of saying: “The more money you make, the more taxes you will pay.” That seems fairly simple and most people know that. What they usually don’t understand is what it actually means to them. We have in Canada what is called a Progressive Tax Bracket System that has levels of which certain amounts of tax are paid. Here is the breakdown of the Federal Tax Brackets (2017):
on the first $45,916 | 15% | |||
on the next $45,915 ($45,916 up to $91,831) | 20.5% | |||
on the next $50,522 ($91,831 up to $142,353) | 26% | |||
on the next $60,447 ($142,353 up to $202,800) | 29% | |||
Anything over $202,800 is taxed at the 33% rate |
Federal Basic Personal Amount: $11,635 (eligible for a non-refundable tax credit)
Seems fairly simple right? Well, where it gets confusing for most Canadians is that they assume that when they make more money, all their earnings get taxed at the new higher-taxed brackets rate. That is simply not true. Every dollar you make up to $45,916 is taxed 15%. Every dollar over and above that amount is taxed at the 20.5% rate until you hit the next level. So if you make $45,917 this year, (1 dollar more than the first tax bracket), only one dollar will be taxed at the higher amount. The majority of your income still falls into the first tax bracket. Many people believe they entered into a whole new level where all their money is taxed at 20.5%. Every dollar you make between $45,916 level and up to $91,831 will be taxed at 20.5%. The first $45,916 is ALWAYS taxed at the 15% rate. So while it does mean you get taxed more if you make more, it doesn’t penalize you like many think it does.
Marginal Tax Rate:
A marginal tax rate is the amount of tax paid on an additional dollar of income. The marginal tax rate for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon their earnings, with low-income earners being taxed at a lower rate than higher-income earners.
Canadian Tax Calculator:
https://simpletax.ca/calculator
Provincial Tax Brackets
Our provinces here in Canada work the same way the Federal Government does with a progressive tax system. Yes, you pay provincial tax as well as federal! Provincial Tax rates are lower than federal and added together they give you your combined tax rate. Here are Ontario’s Provincial Tax Brackets:
first $42,201 | 5.05% |
over $42,201 up to $84,404 | 9.15% |
over $84,404 up to $150,000 | 11.16% |
over $150,000 up to $220,000 | 12.16% |
over $220,000 | 13.16% |
Provincial Basic Personal Amount: $10,171 (eligible for a non-refundable tax credit)
Combined Tax Rates are as follows:
first $42,201 | 20.05% |
over $42,201 up to $45,916 | 24.15% |
over $45,916 up to $74,313 | 29.65% |
over $74,313 up to $84,404 | 31.48% |
over $84,404 up to $87,559 | 33.89% |
over $87,559 up to $91,831 | 37.91% |
over $91,831 up to $142,353 | 43.41% |
over $142,353 up to $150,000 | 46.41% |
over $150,000 up to $202,800 | 47.97% |
over $202,800 up to $220,000 | 51.97% |
over $220,000 | 53.53% |
All Charts are from Taxtips.ca: http://www.taxtips.ca/taxrates/on.htm
Now while that graph is somewhat confusing I have some important points to take away from this post:
1) Making more money is never a bad thing
Some people think that making more money is a bad thing because “the government will get it all anyway.” That is the furthest thing from the truth. If I give you 50 dollars and take back 10 you have 40 dollars. If I give you 100 dollars and take back 30, you have 70 dollars. 70 dollars is still more than 40 so making more money is not a worthless endeavor.
2) You must find any way possible to bring down your income
This one is simple, yet many people fail to take advantage of the many ways to bring down their taxable income. Whether it is through permissible tax deductions or RRSP contributions, it should be a goal of everyone’s to legally bring down their taxable income.
3) Taxes aren’t going anywhere, so stop complaining
Way before you were born, there were taxes. Long after you die there will be taxes too. I know some people that complain about taxes like it is some newfound phenomenon. During the history of our country, people have always paid taxes and many of them bought a home, went on vacations, and even retired at a comfortable age. It is not taxes that will stop you from achieving your dreams. It will be your ability to navigate through our economic system that could make or break you. You don’t have to be a tax expert, just try not to shoot yourself in the foot and of course, pay your taxes.
In my humble opinion, we have a pretty fair taxation system. It may be on the heavy side of taxation, I will definitely admit that. It does, however, put the heavier burden on those who can handle such a burden. It now becomes incumbent on all of us to strive to be taxed as little as possible while staying within the legal limits. Most successful people try to focus on tax efficiency, as they know it will help them far more than investment performance. Use the methods that exist and have a good accountant to show you the ins and outs.
If you have any questions please do not hesitate to message me at joe@budgetboss.ca.
“After military service, the most patriotic thing you can do as a wealthy person is pay your taxes.” – Mark Cuban
Email – joe@budgetboss.ca
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