Friday Final Reflection: September 22, 2017
5 Tax Myths and 5 Tax Facts
In order to truly understand taxes, it takes time and dedication. For the majority of us, we don’t want to take the effort to learn how to become an accountant. The good news is that understanding the tax code in and out isn’t necessary to file a proper tax return. Over the course of the week, we have discussed several things that will give you a strong base to use your taxes more efficiently. If you know where to effectively put your money and also what to claim on your return then you should be able to minimize your tax burden. A major problem that exists when it comes to taxes is the lack of information and the proliferation of bad information. There are a lot of myths in the tax world and they can be damaging to your bottom line. In today’s post, I will aim to debunk some of those myths so that you have the right information in regards to your taxes. I believe a bad lie is more powerful than a good truth so let’s get to the bottom of these tax myths.
Myth 1 – Working more or getting a raise is useless because you will jump a tax bracket
It is never, ever, ever useless to make more money. Our tax system is what is known as a progressive tax system which means you pay more tax if you pay more money. What people don’t understand about our system is that crossing the threshold of a new tax bracket does not mean you pay that percentage of tax on all your income. You only pay the higher tax percentage on the money you make that resides in that bracket. For example, if you make 50K a year and a higher tax bracket is at the 45K level, you would only pay the higher tax on the 5K of money that falls in that level. The first 45K of your money will be taxed at the lower level.
Canada’s Federal and Provincial Tax Brackets:
Myth 2 – Maternity Leave is not taxable income
You are required to report your EI benefits as income. In most cases, Service Canada withholds less than the lowest tax rate so you may have tax obligations at the end of the year. You will more than likely get the tax you pay back in your return, but it still must be claimed.
Myth 3 – If you earn less than 10K you don’t have to file a return
You always have to file a return if you make income. That does not mean you will be taxed. All it means is that the government wants to know about any earned income. Furthermore, it is in your best interest to file every year so you can receive the benefits of GST/HST payments over the course of the year.
Myth 4 – Child support is tax deductible for the payer and counts as income for the recipient
If you are paying child support payments, those funds are not tax deductible unless the agreement was dated before May 1st, 1997. Also, if you are receiving child support payments, that money is not considered income. This, in my mind, is another reason to only have kids when the time is right.
Myth 5 – Mortgage Interest is a Tax Deduction
You can only claim mortgage interest as a tax deduction if you are working out of your home. Even then you can only claim a portion of your self-employed income as a business expense. Where home owners get a tax benefit is when they sell their home. Principal residency gets the capital gains exemption. Other properties owned pay capital gains tax which is half of the gain and then charged your marginal tax rate of that year.
Fact 1 – You can go to jail for not paying your taxes
Although sending people to jail for not paying their taxes is rare, the government can imposed up to 5 years in prison for not paying your taxes. They approach collect unpaid taxes with a semi-mafia mentality. They know if you are in jail they can’t get their money back, so they want you on the outside paying the penalties and interest. They reserve jail time for those who are philosophically opposed to paying taxes. Don’t be one of those people!
Fact 2 – You can’t escape your student loan
A while back, the government of Canada imposed rules that don’t allow people to default on their student loans. Too many people with going bankrupt and then starting fresh with no debt. They closed that loophole and now any unpaid student loan debt with the government of Canada is eventually attached to your Canada Revenue Agency (CRA) file. They can even garnish your wages for unpaid debts. You cannot escape student loan debt and that is why I have claimed it is the worst kind of debt there is.
Fact 3 – Businesses pay more taxes than regular people
While it may be true that businesses pay more taxes than ordinary people, they also have more deductible expenses at their disposal. One of the attractive aspects of owning a business is that almost everything you do is business related and therefore can be claimed on your tax return. You also can determine your own salary as well which can be a benefit come tax time. Let’s just put it this way: If it wasn’t profitable to own a business, no one would do it.
Fact 4 – The Government taxes you even when you die
There are estate taxes when you die. Probate charges are levied when someone dies and applied against the estate. In Ontario the fees are $5 for every $1000 of estate value up to $50,000. Anything over $50,000 is $15 per thousand dollars. This means that for an estate worth 1 million dollars, the recipients would pay $14,500 in probate. Only Life insurance proceeds bypass probate and that is one more great reason to get life insurance. Also, creditors can put liens on estates if the deceased owes money, yet another good reason to buy life insurance. The feds will get you, even from beyond the grave!
Fact 5 – You pay tax on RRSP withdrawals
This one is blatantly true and yet I still hear complaining from some when it comes time to withdraw from their RRSP. The RRSP is a tax-deferred vehicle which means it is paid for with “before tax dollars” and you pay the tax when you withdraw. The point of it is to pay the tax at withdrawal time when you tax rate is much lower. Also receiving the immediate tax deduction helps as well. Maxing out your RRSP can save you thousands of dollars over your lifetime plus provide a large nest egg for retirement. Millions of Canadians use it so never think of it as a fruitless endeavor.
Having all the facts is the best way to get more back from your tax return every year. With a wealth of knowledge at your fingertips there is really no excuse to not get the best tax return possible. A simple rule of thumb for a solid financial plan is:
Be a saver not a spender
Do not incur costly debt
Invest early and often
Reduce taxes when possible
Protect assets with insurance
If you do those 5 things you will retire a millionaire. Let’s be honest, the government gets enough of your money. You should make it your aim to give them as little as possible, legally of course….
Thanks for reading my post today and don’t forget to tune in at lunch for our recap of Tax Week at Budget Boss coming live from Innovation Works in beautiful Downtown London. If you have any questions regarding tax-efficiency please do not hesitate to contact me at firstname.lastname@example.org. Have a great weekend friends!
“We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” – Winston Churchill
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Joseph James Francis is a Financial Advisor. You can find him on various social media platforms and at www.budgetboss.ca.