Personal Income Tax 101
Canada Revenue Agency opens Feb 11 2013; this means you can file your own electronically (note my caution later in the article), those of us tax professionals can begin to e-file our clients’ returns and CRA will start to process paper filed returns.
Before we get into a review of the basics of personal income taxes, a quick note about the few items that are new this year:
Family Caregiver Amount: this is a new federal credit that adds $2,000 to existing credits (spouse, eligible dependent, children’s, and caregiver amount). If you claimed one or more of these credits in the past for in individual that is infirm and dependent on you, you can claim an additional $2,000 on top of the regular credit. You will need a signed statement from a medical doctor (you don’t send the statement in unless CRA asks for it, but get it now so you have it on hand; I hope to have a standard letter for the doctors to complete to make it easier).
Manitoba Education Property Tax Credit for Senior’s basic amount changed from $700 to $1025 (less 1% of net family income). This credit has increased to give more lower-income seniors a break on their property taxes.
Did you know that 5.5 million tax payers file their own tax return (about 20% of all tax returns filed)?
What tax savings are you leaving on the table when you file your own tax return? Medical expenses, pension split, disability tax credit, Manitoba caregiver tax credit, moving expenses, tradesperson’s tools expenses, public transit, children’s fitness and arts credits, Manitoba young adult fitness credit, tuition rebate, student loan interest, volunteer firefighter tax credit.
There are lots of credits and deductions you can be missing if you don’t know about them! If you want to do your own taxes, at least get them done by a tax professional every 3-5 years so you know they are being done correctly! Or at least have them reviewed. I can’t count how much tax money I have saved people over the years.
Are you complaining about the taxes you pay? We can all lower our taxes if we do not participate in the underground economy; don’t patronize businesses that don’t report income (offer a service for cash and not issue a receipt) and pay their fair share of taxes. It’s estimated to be $35 billion; if this income was properly taxed then we’d all be better off.
OK, let’s get to some basics of personal income taxes; I retrieved much of this information from Wikipedia.
Income taxes in Canada constitute the majority of the annual revenues of the federal and provincial governments.
The Canadian income tax system is a self-assessment regime. Taxpayers assess their tax liability by filing a return with the CRA by the required filing deadline. CRA will then assess the return based on the return filed and on information it has obtained from employers and financial companies, correcting it for obvious errors. A taxpayer who disagrees with CRA's assessment of a particular return may appeal the assessment.
Canada levies personal income tax on the worldwide income of individuals resident in Canada.
After the calendar year, Canadian residents file a T1 Tax Return. It is due April 30, or June 15 for self-employed individuals and their spouses. It is important to note, however, that any balance owing is due on or before April 30. Outstanding balances remitted after April 30 may be subject to interest charges, regardless of whether the taxpayer's filing due date is April 30 or June 15.
The amount of income tax that an individual must pay is based on the amount of their taxable income (income earned less allowed expenses) for the tax year. Personal income tax may be collected through various means:
- deduction at source - where income tax is deducted directly from an individual's pay and sent to the CRA.
- installment payments - where an individual must pay his or her estimated taxes during the year instead of waiting to settle up at the end of the year.
- payment on filing - payments made with the income tax return
- arrears payments - payments made after the return is filed
Individuals who have overpaid taxes or had excess tax deducted at source will receive a refund from the CRA upon filing their annual tax return.
An individual taxpayer must report his or her total income for the year.
Certain deductions are allowed in determining "net income", such as deductions for contributions to Registered Retirement Savings Plans, union and professional dues and child care expenses. Net income is used for determining several income-tested social benefits such as the GST Credit, Child Tax Benefit, Pharmacare deductible, Personal Care Home fees, Old Age Security Repayment and others.
Further deductions are allowed in determining "taxable income", such as workers compensation, social assistance, guaranteed income supplement, capital losses, half of capital gains included in income, and a special deduction for residents of northern Canada. Deductions permit certain amounts to be excluded from taxation altogether.
"Tax payable before credits" is determined using various tax brackets and tax rates.
A percentage of the non-refundable tax credits are then deducted from tax payable and include items such as a basic personal amount, dependents, Canada Pension Plan contributions, Employment Insurance premiums, disability credit, tuition and education and medical expenses. These credits are calculated by multiplying the credit amount by the lowest tax rate (26% federal and Manitoba). This mechanism is designed to provide equal benefit to taxpayers regardless of the rate at which they pay tax.
A non-refundable tax credit for charitable donations is calculated at the lowest tax rate for the first $200 in a year, and at the highest tax rate for the portion in excess of $200. Donations can result in a reduction in taxes of up to 46% of the donation. This tax credit is designed to encourage more generous charitable giving.
The following types of income are not reported or taxed in Canada (this list is not exhaustive):
- gifts and inheritances;
- death benefits paid from a life insurance policy;
- lottery winnings;
- winnings from betting or gambling for simple recreation or enjoyment (if you know someone who does on-line gambling for a living, this is taxable income and should be reported);
- strike pay;
- compensation paid to a victim of a criminal act or a motor vehicle accident;
- certain civil and military service pensions;
- war disability pensions;
- income of First Nations, if situated on a reserve;
- capital gain on the sale of a taxpayer’s principal residence;
- Working Income Tax Benefit;
- the Goods and Services Tax Benefit; and
- the Canada Child Tax Benefit.
Wow, that’s just the basics. As always, if you have any questions, please feel free to contact me. Looking forward seeing many of you over the next few months.
Anni Markmann is a Certified Financial Planner, a Certified Professional Consultant on Aging and a Tax Professional living, working, and volunteering in our community. Contact her at 204-422-6631, firstname.lastname@example.org or 36 Dawson Road in Ste Anne.