By Carolyn Norris CPA, CA
Wealth Advisor
Assante Capital Management Ltd.
Let's take a dive into the basics of income tax. Whether you're earning a salary, freelancing, or running your own show, understanding income tax is key.
Income Tax 101:
Income tax is like a membership fee for participating in society – a portion of your earnings that goes to fund public services. Roads, schools, healthcare – you name it. The deal is, the more you make, the more you contribute. It's the price we pay for being part of a functioning society.
Types of Income:
Your income isn't just your salary. It's a medley of cash flows:
Earned Income: This would include your regular employment income (wages, salaries, tips, other taxable employee compensation), usually filed as a T4.
Investment Income: Profits from investments, like stocks & bonds or interest on your savings accounts. This may include T5’s and T3’s. Note, this will not include any income earned in your tax sheltered accounts (ie TFSA or RRSP)
Rental Income: Profit from renting out property that you own.
Business Earnings: If you are self employed or hustling on the side, those profits count too.
Knowing where your money is coming from is the first step.
Taxable vs. Not-taxable Income:
Not all money is fair game for taxes. Gifts, inheritances, and some insurance payouts are usually tax-free. But when it comes to your regular income – like your salary, tips earned, or business earnings – that's taxable. Keeping tabs on what's taxable and what's not helps you plan ahead.
Tax Deductions and Credits:
Here's where you catch a break. Deductions and credits help reduce your taxes owing:
Deductions: these amounts will reduce your taxable income. Some common ones to include are: child care expenses, moving expenses, RRSP contributions, support payments professional or union dues. If you are self employed, there are additional deductions available to you.
Credits: Reduce the amount of tax you pay on your taxable income, some are refundable and some are not. Common ones include donations to charity, medical expenses, or home buyers amount (for first time homebuyers) – these can all lighten your tax load.
Marginal Rate Tax System:
Enter the concept of marginal tax rates. The more you make, the more you might pay in taxes. It's like a sliding scale, with different tax rates for different income brackets. This progressive system ensures that the more you earn, the higher the percentage you contribute in taxes. There are two tax bracket systems in Canada (federal and provincial), so the amount of taxes you will pay depends on
where you live.
Filing Your Taxes:
Once a year, it's showtime. Filing your taxes means reporting all your income, claiming your deductions and credits, and figuring out your final tax bill. The personal tax filing deadline is April 30th each year. Playing by the rules is the name of the game. Late submissions, calculation goofs, or dodging the taxman can lead to trouble.
Keep track of your income sources, leverage those deductions and credits, and file on time. With a bit of preparation, you can handle tax season like a pro. If your affairs become complicated or if the journey gets confusing, consider tapping into some professional advice.
Carolyn Norris is a Wealth Advisor with Assante Capital Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Please contact her at (780) 450-3311 or cnorris@assante.com to discuss your particular circumstances prior to acting on the information above. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
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