|TAXABLE INCOME BRACKET||FEDERAL TAX RATE||COMBINED FEDERAL AND
PROVINCIAL (AB) RATE
|$41,544 or less||15%||25%|
|Between $41, 544 and $83,088||22%||32%|
|Between $83,088 and $128, 800||26%||36%|
|$128,800 and over||29%||39%|
How Does the Income Tax System Work?
In Canada, you generally have to pay income tax on all income that you earn. The normal categories of income include:
- salary or wages
- income from a business or a rental property
- pension benefits
- capital gains (which results when assets increase in value)
A person who receives a gift, inheritance or lump sum maintenance payment generally does not have to pay taxes on these items. After considering all income made from all taxable sources, your income is then reduced by certain deductions to arrive at your total taxable income. Common deductions include:
- pension plan contributions
- RRSP contributions
- union or professional dues
- child care expenses
- moving expenses
Additionally, non-refundable tax credits may be deducted from the tax calculated on your income. Typical tax credits of this type include your “basic personal amount” (currently $10,382) amounts for a dependent spouse, tuition fees for yourself or for children, medical expenses, and charitable donations. In addition to these non-refundable tax credits, there are also refundable tax credits, which are applicable if your income is below a certain level, such as the federal goods and services tax (GST) credit. The current federal system has a rate structure of four marginal tax rates: 15%, 22%, 26% and 29% and four taxable income brackets. The taxable income brackets change each year depending on changes in the consumer price index or inflation. The marginal tax rates apply to the portion of income that falls in the income range. For example, a woman who earned $45,000 would pay federal tax at a rate of 15% on the first $41,544, and 22% on the income greater than $41,544.If you are earning a salary, your employer will deduct income tax from your salary and pay it directly to the government. Depending on whether you earned additional income and on the amount of your tax credits, your employer may have paid the government more or less tax than you actually owe. This will determine whether you receive a tax refund or have to pay more at tax time.
Should I File an Income Tax Return?
Everyone who earns income or who wishes to claim a tax refund or a tax credit must file an income tax return. You must also pay any tax owing by April 30 of the year of filing. If you are late in paying taxes, you may be charged interest or penalties. If you earned less than approximately $9,850 (according to 2011 figures) in the calendar year, you will not be liable to pay any tax. In addition, taking into account the allowable deductions and the non-refundable credits you may be entitled to, you could probably earn another $1,000 or so without having to pay tax. Even if you have no taxable income, you may still have to file an income tax return in order to claim a GST tax credit, a refund of your overpayment of tax, Canada Pension Plan contributions or Employment Insurance contributions, or for other reasons.
Should I Keep Records and Receipts?
The Canada Revenue Agency has broad powers to look into a taxpayer’s tax information. Certain receipts do not need to be included with your return, but you must produce them if the Canada Revenue Agency decides to audit you. The Canada Revenue Agency states that you should keep your supporting documents for six years. For example, for a tax return filed in 2011, you should keep supporting documents until 2017. Also, keep photocopies of the receipts you do send in, and keep a copy of your income tax return and the Notice of Assessment which they mail to you.
How Can I Find Out More About Income Tax?
Income tax information quickly gets outdated, so do not rely on this or any other general overview. Each year, Canada Revenue Agency prepares a free detailed guide to assist taxpayers in preparing their tax returns. If you do not receive this in the mail, you can pick one up at your nearest post office or the Canada Revenue Agency Office. Canada Revenue Agency will also answer questions over the telephone (see chapter ten of this booklet) and will mail you additional information upon request. Information can also be obtained from their website: www.cra-arc.gc.ca. For more complicated questions you should contact a chartered accountant or a tax lawyer.
Registered Retirement Savings Plan (RRSP)
Among all the allowable deductions you can make, the RRSP contribution is the one you usually have the most control over. It is an excellent way of reducing the taxes payable in any one year, while building up a secure investment for your future. You are allowed to make RRSP contributions up to a certain amount (depending on your income). The administrator of your plan will be able to give you more information
Remember that contributions to an RRSP must mature by December 31 of the year in which you turn sixty-nine years of age. This means that the RRSP funds become fully taxable unless you transfer them to an annuity for a fixed term, an annuity for life or a Registered Retirement Income Fund (RRIF). An annuity is a type of plan that pays out a fixed amount every year. You will pay tax on that fixed amount, not the full balance. You can contact an accountant or plan administrator for more information on this. At the time they are made, the amount you contribute will be deducted in arriving at your taxable income and you will not be taxed on the amount you contribute. This will lower your income tax for that year. You will be taxed on the money and on the interest earned when you withdraw it in the future. However, presumably when you withdraw it this will be during retirement when you will probably be in a lower tax bracket. If you separate or divorce from your spouse, a tax-free transfer of RRSP funds can be made from one spouse to the other. The spouse receiving the money will not have to pay tax until the funds are withdrawn, and the tax will be based on her own income level rather than that of the spouse who transferred the money.
Child Care Expenses
If you are the only person supporting a child, or if you are the spouse with the lower income, you may deduct actual child care expenses up to a certain maximum. This deduction is in respect of children who are dependent on you and who are under seventeen or who are older than seventeen but are physically or mentally infirm. Child care expenses must have been necessary to allow you or your spouse to: (1) earn income, (2) carry on business alone or as an active partner, (3) attend school, or (4) carryon research or similar work for which you received a grant. (Note than in certain situations, the spouse with the higher income can claim this deduction.)
In 2010, the maximum allowable amounts were $7,000 for each child seven years of age or younger, for whom the disability amount cannot be claimed, $10,000 for each child over one year of age, for whom the disability amount can be claimed and $4,000 for each child between eight and seventeen years of age, (or eighteen and older, with a mental or physical impairment, for whom the disability amount cannot be claimed).
You do not have to file receipts with your return, but you must keep the receipts for examination on request. Note that childcare expenses include not only daycare and babysitting, but also summer camps and boarding schools. This deduction is up to a maximum of two-thirds of earned income. If there is no income earned, there is no deduction.
Child Fitness Credit
You may also be able to claim up to $500 per child of fees paid for physical activity programs children who are dependent on you and who are under seventeen or who are older than seventeen but are physically or mentally infirm. This is for the fees that relate to the cost of registering you or your spouse’s or common-law partner’s child in a prescribed program of physical activity.
To be eligible, the physical activity program must:
- be ongoing (either a minimum of eight consecutive weeks long or, for children’s camps, five consecutive days long);
- be supervised;
- be suitable for children;
- require a significant amount of physical activity that contributes to cardio-respiratory endurance, plus one or more of:
- muscular strength;
- muscular endurance;
Income Tax on Separation or Divorce
You may deduct your legal expenses for making application for and enforcing an order for spousal and child support, but you may not deduct the legal expenses for the separation or divorce itself. You may also deduct the expenses to apply for an increase in the support.
Spousal support is deductible by the payor (usually the husband) and taxable by the payee (you); that means you will add the amount of spousal support to your income and you may pay tax on it. Child support is neither taxable nor deductible. The spouse who has custody of the children is entitled to claim an “equivalent to married” non-refundable tax credit. If you and your spouse separate, it is important that your spouse gives Canada Revenue Agency a new separate address or that you otherwise provide Canada Revenue Agency with proof of the separation or divorce. If you do not do so, you risk Canada Revenue Agency pursuing you for your former spouse’s tax liability in the future.