How Taxes Work in Canada 🍁 - Learn to Lower Your Tax Bill

Summary

In this video, Joe from Avalon breaks down the complexities of personal taxes in Canada in a simple and accessible way. He explains the two types of income tax: federal and provincial, and how they are applied progressively based on your income. The video covers different types of income, such as employment, investment, and business income, and outlines tax deductions and credits that can reduce your tax burden. Joe also demonstrates how to estimate your tax refund using a quick online calculator. By the end, viewers will understand how Canadian taxes work and how to optimize their tax filings.

Takeaways

• 😀 Personal taxes in Canada include both federal and provincial income taxes, which have separate tax rates that stack on top of one another.
• 😀 The amount of tax you pay increases with income in a progressive tax system, meaning higher income is taxed at higher rates, but only the income within each bracket is taxed at its respective rate.
• 😀 Employment income is the most common type of income and is taxed at both federal and provincial levels. Employers withhold tax, Canada Pension Plan (CPP), and Employment Insurance (EI) premiums on behalf of employees.
• 😀 Investment income is taxed differently from employment income. Interest income is taxed at regular rates, while dividend income benefits from preferential tax treatment, reducing the overall tax liability.
• 😀 Capital gains are taxed only on half of the gain made from selling property or investments, with the taxable portion subject to normal tax rates.
• 😀 Self-employment income, such as business income, allows deductions for related business expenses, reducing the taxable income and overall taxes owed.
• 😀 Tax deductions reduce your taxable income, while tax credits directly reduce the amount of tax you owe. Both serve to lower your overall tax bill, but they function differently.
• 😀 Common tax deductions include RRSP contributions, child care expenses, and moving expenses, all of which help reduce taxable income and lower taxes owing.
• 😀 Non-refundable tax credits, like the basic personal amount and home buyers amount, are applied after calculating taxes owed to further reduce the liability, but only to a limit.
• 😀 Estimating your tax refund or balance owing can be simplified using online calculators, such as the WealthSimple tax calculator, which requires only basic information like income and taxes already paid.

Q & A

What are the two types of income taxes for individuals in Canada?

In Canada, individuals are subject to two types of income tax: federal income tax and provincial income tax. These taxes are separate, have their own rates, and stack on top of each other.

How does a progressive tax system work in Canada?

In Canada, a progressive tax system means that as your income increases, the tax rates applied to your income also increase. However, the higher tax rate is only applied to the portion of income within that specific tax bracket, not to the entire income.

What is the misconception about higher tax brackets in Canada?

A common misconception is that earning more income will put you in a higher tax bracket and tax all of your income at that higher rate. In reality, only the income within that higher tax bracket is taxed at the higher rate.

What are the different types of income in Canada, and how are they taxed?

In Canada, the main types of income are employment income, investment income, and business (self-employment) income. Employment income is subject to federal and provincial taxes, investment income (interest, dividends, and capital gains) has different tax treatments, and business income allows for the deduction of many expenses.

What is the benefit of holding investments inside a TFSA or RRSP?

Holding investments inside a TFSA (Tax-Free Savings Account) or RRSP (Registered Retirement Savings Plan) means that you can earn income within these accounts without paying tax on the income during the year it is earned. This helps in tax deferral or tax exemption depending on the account type.

How are capital gains taxed in Canada?

In Canada, only half of the capital gains you earn are taxable. For example, if you sell an investment for a gain, you will only be taxed on 50% of the gain after deducting your adjusted cost base (ACB), which includes the purchase price plus any acquisition costs.

What deductions can reduce taxable income in Canada?

Common deductions in Canada include RRSP contributions, child care expenses, and moving expenses. These deductions lower the taxable income, which in turn reduces the amount of tax you owe.

What is the difference between tax deductions and tax credits?

Tax deductions reduce your taxable income, which lowers your total tax liability. Tax credits, on the other hand, reduce the amount of tax you owe directly, providing a dollar-for-dollar reduction in your tax bill.

How do tax credits, like the basic personal amount and home buyer's amount, impact taxes?

The basic personal amount is a non-refundable tax credit that every Canadian can claim, reducing the taxes owed. The home buyer's amount allows you to claim a credit if you bought a qualifying home, reducing the tax burden further, up to $10,000.

How can someone estimate their tax refund or balance owing in Canada?

To estimate your tax refund or balance owing, you can use the Wealthsimple Tax Calculator. By inputting your province, income, RRSP contributions, and taxes already paid, you can get an estimate of whether you'll owe more or receive a refund.