Let's Talk: Taxes

Here's a fun little riddle. You can run but you can't hide from them. Sooner or later, they'll come looking for you! Other than death, this is also a certainty. I am of course referring to taxes. Taxes are understandably a very confusing topic. The rules around them are constantly changing from the numbers to regulations. They also change with the current political party running our country. It may go up for some years and down for others. Now I'm no tax professional but I want to help explain some basic concepts around taxes to help you better plan your personal finance.

Basic Personal Amount

Did you know that if you made less than a certain amount each year, you wouldn't have to pay any taxes? Any taxes that were deducted from your paycheque would then be refunded to you after you file your taxes. If you earned over the basic personal amount, you would receive a tax credit, which is used to deduct your taxes. For an average worker, this information may not be as helpful because they earn more than the threshold. However, I think students will find this information very interesting as they typically don't earn very much. When students file their taxes either with a specialist or through their school program, a lot of information is left out. They're just happy to know that they received a refund and this is the reason why. Changes were recently made by the Canadian government to increase the threshold to $15,000 by 2023. The basic personal amount will continue to increase with inflation afterwards. Here's a quick list of the current amount and their annual increases for the next few years:

• 2020 - $12,298
• 2021 - $13,808
• 2022 - $14,398
• 2023 - $15,000

There is also a basic personal amount for individual provinces. The threshold is different but its purpose to reduce your taxes is the same. You can see the updated numbers here each year.

Income Tax Brackets

As you may already know, taxes must be paid when working any job. Did you also know that the taxes are divided into 2 categories? The first is federal taxes. As the name implies, the taxes go to the federal government. The other is provincial/territorial taxes. These go to the provincial governments. The amount of tax you owe depends on where you live. Some provinces have a higher tax rate than others.

The amount of taxes you owe also depends on how much you make as an individual. Here in Canada, we use a bracket system. This results in paying more in taxes, the more you make. I actually hear this line a lot and many people seem to have a misunderstanding about this and refuse to work more. I'll explain by placing the Canadian federal tax bracket system for 2020:

This is where the confusion comes in and understandably so. If you make enough to be bumped to the second bracket with a tax rate of 20.5%, it does not mean your entire income is taxed at 20.5%. Your first income of $48,535 will be taxed at a rate of 15% and any amount that falls between the second tax bracket will be taxed at 20.5%. Hopefully, this clears up this common misunderstanding of our tax bracket system. These numbers are indexed every year, meaning they are adjusted for inflation. You can save this link to check on the current year if you are reading this post from the future.

The same rules apply for provincial/territorial taxes. Here's a link for each individual province/territory and their tax rates.

Taxes on Sources of Income

There are several ways you can earn income. Depending on how you earned it, there are different tax consequences for each source. The main sources to earn income are capital gains, dividends, interest and work. I have already discussed how your working income is taxed. I'm going to quickly cover the remaining sources of income and how they are taxed.

• Interest - Money earned in a savings account, GIC, bonds
• Capital Gain - Money earned from buying at a lower price and selling at a higher price
• Dividend - Money earned from owning stocks

You're looking at the chart and probably wondering what marginal tax rate is. Well, it's the tax rate for interest, capital gain or dividends income. Each person's marginal tax rate is different depending on their total income but generally, they are:

• 25% - lowest earners
• 30.5% - mid earners
• 36% - high earners
• ~38-48% - really high earners 

You can use a tax calculator to figure out your marginal tax rate here. Remember, these tools are also found in the Resources tab from the homepage of my blog.

Deadline

Lastly, make sure you file your taxes each year before the deadline, which is normally April 30. Filing late may result in penalties or having benefits being withheld. It's important to make sure that you have all your tax slips from all employers and financial institutions. Unless your tax situation is complicated, you do not need help from a professional to file your own taxes. There are free software programs like SimpleTax and TurboTax which makes filing easier for the average person.