There’s less than a month before the deadline to file your taxes, and I’ve been heavy into researching everything there is about taxes in Canada because, well, I actually really like taxes. I’m a weirdo (I know!), but it is what is it? I’m a money nerd and proud of it.
But not only that, but I’m also ramping up my efforts to become an Accredited Financial Counsellor (my goal is to finish before the summer’s end), so I’m feeling pretty in the zone this tax season.
During my in-depth tax research, I stumbled upon a few things that made me pause. And not necessarily because I didn’t already know them. More because I never thought to think of them come tax season (if that makes sense?). Things that I feel you would also like to know, so you can also go “Ah, I forgot about that. I feel so much smarter now.”
Ready? Let’s do this. I promise it won’t be as dry or boring as you might expect. PROMISE!
1. You Don’t Have to Pay Taxes on All Types of Income
Did you know that not all income is taxable? Okay, don’t get too excited, because the main ones still are. Incomes that are still taxable include: employment income (salaries, wages, commissions, tips, bonuses, and the like), the business income you’ve netted, the income you’ve made from investments (such as interest, dividends, and rental income), retirement income (from a corporate pension plan and/or RRSP), income from government programs (like CPP, EI and Old Age Security) and of course taxable capital gains. You’re also on the hook for spousal support and some child support payments, just so you know.
BUT…you do not have to pay income tax on the money you win from the lottery (win-win right?), inheritances, your GST/HST rebate, some child support payments, the Canada Child Tax Benefit, and lastly any scholarships, fellowships, and bursaries if you’re a student eligible for the full-time or part-time education amount.
2. Tax Credits and Tax Deductions Are Very Different Things
Many people use these terms interchangeably (I definitely have, I’m not proud to admit!), but they are two very different beasts.
When you’re filing your taxes, you’ll hear a lot of talk about tax credits. For instance, you’ll probably read somewhere or be told by someone that you’d be an idiot not to take advantage of the charitable donation tax credit or the public transit pass tax credit to lower your tax bill. It’s a no-brainer, so just do it! Now, what this actually means is these tax credits offer a dollar-for-dollar reduction in the amount you owe on your taxes.
So if you donated some money to charity and ended up with a charitable donation tax credit of $100, that means that $100 will be deducted from your tax bill.
Tax deductions, on the other hand, a popular one being your RRSP contribution, reduces your taxable income. The big reason you would want to lower your taxable income is that it could mean getting yourself into a lower tax bracket.
3. Being in a Higher Tax Bracket Isn’t as Bad as You Think
Speaking of tax brackets in Canada, I feel like there’s a lot of misinformation out there about them. And I’m not talking about misinformation online necessarily, I’m talking about stuff we all hear from friends, co-workers, and people who think they know what they’re talking about, but even they know they don’t really know…you know?
Okay, let’s talk tax brackets. Many Canadians are under the impression that if you get into a higher tax bracket, it means you’ll be paying a higher tax rate on the entirety of your income. Good news, that’s not the case at all!
Here’s a fun example to give you a clear idea of what I’m talking about.
Let’s pretend you live in Ontario and you made $50,000 in 2016. Using the combined federal and provincial tax rates below as your guide, you would pay 20.05% on the first $41,536 you made, then 24.15% on the next $3,746, then 29.65% on the remaining $4,718.
The common misconception is that if you made $50,000, you would have to pay 29.65% on the entire $50,000. Nope, and thank god! That would be painful.
|Combined Federal & Ontario Tax Brackets 2016||Rate|
|$41,536 – $45,282||24.15%|
|$45,282 – $73,145||29.65%|
4. Here’s How to Find Out Which Province You Should File Under
This may not be an issue if you haven’t moved provinces and don’t intend to, but if you have or you do…listen up! Whatever province you were living in on December 31, 2016 (or December 31 of the taxation year), that’s your province of residency when filing your taxes.
Now, if you tend to move between provinces a lot for work or school and are still unclear what province to file under, it’ll be the province where you’ve got the most significant residential ties.
The more you know, right?
5. Yes, There Are Two Deadlines for Filing Your Taxes in Canada (But Not Really)
I’m being a little cheeky here, because yes technically there are two different deadlines for filing your taxes: April 30 for regular folk and June 15 for self-employed folk.
That being said, I personally just don’t believe in the second one. Sure, it exists, but I don’t care. Every single year that my husband has been self-employed, I try to stress that he should just ignore the second deadline and file by the first deadline instead.
Why am I so crazy about this? Because what so many self-employed people don’t realize is that even though they have some extra time to file their taxes, if they file after the April 30 deadline they will also have to pay interest on their tax bill. And since most self-employed people do have a balance owing after filing their taxes, it just seems ridiculous to have to pay interest when you could have so easily avoided it if you’d just filed your taxes by April 30 like everybody else.
Okay, that’s it, end rant.
What else do you want to know about taxes in Canada? Let me know in the comments and it might appear in a follow-up blog post!