Income Taxes

Living in Canada, you are certain of only 2 things: Death and Taxes! Now, we can't do anything about the first, but we can strive to reduce and even in some cases eliminate the second. The sad part is, living in this country, you're taxed even after you die. I like to refer to the 'tax man' as the "Maple Leaf Foundation".

There are many tax-reducing strategies that are there, but I won't get into all of them specifically in this post. In this post, I'm just going to talk about the different tax brackets. I won't get into too much detail about the different provinces, so I will focus mostly on Income Taxes in Ontario.

Canada's Tax system is setup in a 'tiered' sort of manner. This basically means, the more money you make, the higher your tax bracket is. Also, there are 2 tax rates we pay: Federal and Provincial. Below are the numbers for the 2012 Tax Year

First lets take a look at the federal brackets which are the same for all Canadian tax-payers:

- 15% on the first $42,707 of taxable income, +
- 22% on the next $42,707 of taxable income (on the portion of taxable income between $42,707 and $85,414), +
- 26% on the next $46,992 of taxable income (on the portion of taxable income between $85,414 and $132,406), +
- 29% of taxable income over $132,406

(Reference: http://www.taxtips.ca/taxrates/canada.htm)

Also note, there is a federal personal amount of $10,822, which means that you don't pay tax on the first $10,822. There is a tax credit of 15%, which means you will get $1623.30 as a tax credit.

In Ontario, the provincial taxes are not as high, but still play a toll on the take-home income. For taxpayers in Ontario, the rates are as follows:

- 5.05% on the first $39,020 of taxable income, +
- 9.15% on the next $39,023 +
- 11.16% on the amount over $78,043

(Referece: http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html#provincial)

Also note, there is a provincial personal amount of $9,405, which means that you don't pay tax on the first $9,405. There is a tax credit of 5.05%, which means you will get $474.95 as a tax credit.

Example

Ontario Taxpayer earning employment income of $50,000.

First, Calculate the federal taxes payable:

15% on the first $42,707 = $42,707 x 0.15 = $6406.05
22% on the next $7,293 ($50,000 - $42,707) = $7,293 x 0.22 = $1604.46

$6,406.05 + $1604.46 = $8,010.51

However, remember to subtract the personal tax credit of $1,623.30 --> $8,010.51 - $1623.30 = $6,387.21. Therefore the federal taxes payable are $6,387.21.

Second, Calculate the provincial taxes payable:

5.05% on the first $39,020 = $39,020 x 0.0605 = $1,970.51
9.15% on the next $10,980 ($50,000 - $39,020) = $10,980 x 0.0915 = $1004.67

$2,229.30 + $1,203.41 = $2,975.18

However, remember to subtract the personal tax credit of $474.95 --> $2,975.18 - $474.95 = $2500.23

By adding both the federal and provincial taxes, you will get the total taxes payable, which is $6,387.21 + $2,500.23 = $8,887.44. This will give you an average tax rate of 17.77% ($8,887.44/$50,000 = 17.77%). The concept of “Average Tax Rate” is just a way of figuring out roughly how much of your income is going to the government in the form of personal income tax - remember, average tax rates serve no purpose when it comes for filing taxes.

Marginal Tax Rates (MTR) are different; they come into play for many calculations and are important in calculating the effects of certain financial strategies (for example, the amount of taxes you pay when withdrawing from an RRSP). Marginal Tax Rate, by definition, is "the amount of tax paid on an additional dollar of income". To calculate your MTR, you add the highest federal tax you pay and the highest provincial tax you pay. Using the above example, we can see that the MTR is 31.15% (22% federal tax + 9.15% provincial tax).

If you don't want to do the math yourself, there are sites that will calculate the taxes payable and marginal taxes rates for you, just by you inputting your income and province into the calculator. Some sites I found helpful were:

http://www.tax-services.ca/2012-income-tax-calculator-canada/
http://www.ey.com/CA/en/Services/Tax/Tax-Calculators-2012-Personal-Tax

Taxes can be a very tricky thing, so please consult a tax professional for any strategies and advice. Please remember, the tax rules change every year, so the amount you pay in taxes will also, in effect, change every year. If you require any more information or have any questions, you can contact me or your tax professional!