Personal Tax Guide from a Tax Accountant

Understanding personal tax, especially Canadian income tax, is key to making smart financial decisions and reducing tax. This tax accountant guide will cover taxable income, tax credits and deductions, tax planning, optimization and compliance – all the main parts of personal tax in Canada.

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Taxable Income: The Base of Personal Tax

Taxable income is the foundation of the Canadian tax system. It includes employment income, business income, capital gains and other types of income earned by individuals. According to the Canada Revenue Agency (CRA) taxable income is total income minus allowable deductions and exemptions. Knowing your taxable income is critical to filing accurate tax returns and avoiding penalties.

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In 2022 the median total income for Canadian families and unattached individuals was around $66,800. This is the base to understand how different types of income contribute to taxable income and how individuals and families are taxed.

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Types of Taxable Income

• Employment Income: Wages, salaries and benefits from employment. This is the most common type of income for most Canadians.

• Business Income: Income from self-employment or owning a business.

• Capital Gains: Profit from the sale of investments such as stocks, bonds or real estate.

• Other Income: This includes rental income, dividends, pensions and certain government benefits.

• Eligible Dividends: Dividends from larger corporations that are grossed-up by a higher percentage and come with a specific dividend tax credit. This reflects the corporate taxes already paid and helps to avoid double taxation for individual shareholders receiving these dividends.

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Income Tax Rates and Brackets: Progressive System

Canada has a progressive tax system with multiple rates and brackets. The federal government sets these rates and brackets and provinces and territories may have their own. Rates vary based on the individual’s taxable income and their province or territory of residence. The brackets are adjusted annually for inflation to reflect economic changes.

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Federal Tax Brackets (2023)

• 15% on the first $53,359 of taxable income

• 20.5% on the next $53,359 (up to $106,717)

• 26% on the next $53,359 (up to $165,430)

• 29% on the next $63,193 (up to $228,223)

• 33% on income over $228,223

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Provincial Tax Brackets: Ontario Example

Each province and territory has its own rates and brackets. For example, in Ontario the provincial rates for 2023 are:

• 5.05% on the first $47,630 of taxable income

• 9.15% on the next $47,629

• 11.16% on the next $12,537

• 12.16% on the next $22,290

• 13.16% on income over $129,586

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Provincial income taxes, as per Section 92, Paragraph 2 of the Constitution Act, 1867 are applicable to individuals living or earning income in any province or territory. These taxes are calculated and collected along with federal income taxes with different rates across different jurisdictions.

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Knowing federal and provincial tax rates is important for tax planning and filing.

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Tax Credits and Deductions: Reduce Tax

Tax credits and deductions are the key to reducing tax and increasing refunds. Common tax credits are the basic personal amount, spousal amount and the Canada Child Benefit. Deductions might be for charitable donations, medical expenses and home office expenses. The CRA has a list of all eligible tax credits and deductions on their website.

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The dividend tax credit is a mechanism in Canadian tax law that avoids double taxation of corporate income distributed as dividends to individuals. It involves a gross-up and specific rates for different types of distributions from corporations, reducing the overall personal tax liability for Canadian residents.

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Refundable tax credits are also important as they can reduce taxpayers’ liabilities and result in refunds through the Canada Revenue Agency.

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Common Tax Credits

• Basic Personal Amount: For 2023 the federal basic personal amount is $15,000. That means you can earn up to $15,000 without paying federal income tax.

• Spousal Amount: If you support a spouse or common-law partner with a net income less than the basic personal amount you may be eligible for this credit.

• Canada Child Benefit (CCB): A monthly payment from the government to help families with the cost of raising children under 18. It’s tax-free, meaning you don’t have to pay any taxes on it.

• Dividend Tax Credit: Helps avoid double taxation of corporate income distributed as dividends to individuals. It involves a gross-up and specific rates for different types of distributions from corporations, reducing overall personal tax liability for Canadian residents.​

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Common Deductions

• Charitable Donations: You can claim donations to registered charities.

• Medical Expenses: Deduct medical expenses that exceed 3% of your net income or $2,421, whichever is less.

• Home Office Expenses: If you work from home you may be eligible to claim expenses related to your home office.

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Reporting Income and Filing Taxes: Required

Individuals must report their income and file an income tax return with the CRA every year. Filing an income tax return is important to meet your tax obligations and access benefits. There are resources for first-time filers to help you get started.

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Filing Deadlines

• April 30th: General deadline for most individuals.

• June 15th: Deadline for self-employed individuals and their spouses or common-law partners.

• April 30th: Payment deadline for any balance owing.

 

Taxpayers can file online or by mail and may be eligible for a refund if they overpaid their taxes. Employers deduct taxes from employees’ paycheques and there are credits to reduce the amount of tax payable.

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In 2022, about 90% of Canadian tax returns were filed electronically. The CRA’s online services, such as NETFILE, make it easier to file your return accurately and on time.

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Tax Planning and Optimization: How to Minimize Tax

Good tax planning is about minimizing tax liability and maximizing refunds. Tax optimization strategies include income splitting, tax-loss harvesting and strategic charitable donations. Working with a tax professional or using tax software can help optimize your tax situation.

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Tax Planning Strategies

• Income Splitting: Shift income to a lower-income family member to reduce overall tax burden.

• Tax-Loss Harvesting: Sell investments at a loss to offset capital gains.

• Registered Retirement Savings Plan (RRSP): Contribute to an RRSP to save for retirement. Contributions are deductible, reducing taxable income now, with taxes deferred until withdrawal in retirement.

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Tax Planning Benefits

• Bigger Refunds: By claiming more deductions and credits.

• Less Tax Payable: By planning and timing of income and expenses.

• Compliance: So you meet tax laws and regulations and avoid penalties.

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Tax Implications of Life Changes: Adjustments

Life changes such as marriage, divorce and having children can impact an individual’s tax situation. Taxpayers may be eligible for specific tax credits and deductions related to these changes. The CRA has information on how to report these life changes on your tax return.

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Life Events

• Marriage or Common-Law Partnership: May be eligible for spousal credits and benefits.

• Divorce or Separation: Changes in marital status can impact tax obligations and eligibility for certain credits.

• Birth of a Child: Eligible for the Canada Child Benefit and other child-related credits.

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Tax Audits and Appeals: What Are Your Rights

The CRA audits to ensure compliance with tax laws and regulations. Taxpayers have the right to appeal a tax assessment or audit decision. The CRA has information on the audit and appeal process so you know your rights and obligations.

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Audit Process

1. Notification: The CRA contacts you.

2. Documentation: You provide the requested documentation and information.

3. Review: The CRA reviews the information and makes a decision.

4. Appeal: If you disagree with the outcome, you can file an objection and appeal.

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Your Rights

• Representation: You can be represented by a tax professional.

• Fairness: The CRA must be fair and impartial.

• Appeal: You can appeal decisions you disagree with.

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Tax Info: Where to Go

You can get help with your taxes from the CRA, tax professionals and tax software. The CRA website has resources such as tax calculators and FAQs to help you through the process. Use an income tax calculator to get a quick estimate of your refund or taxes owed and manage your taxes.

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Resources

• CRA Website: Guides, forms and tools for taxpayers.

• Tax Professionals: Accountants and tax advisors can provide personalized service.

• Tax Software: TurboTax offers tax preparation and filing platforms.

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Tax Software and Calculators: Make Tax Easier

Tax software and calculators can make tax preparation and filing simpler.

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Benefits of Tax Software

• User-friendly: Step by step guidance through the tax filing process.

• Bigger Refunds: Helps you claim all credits and deductions.

• Error Free: Software checks for common mistakes and ensures compliance with tax laws.

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Tax Software Options

• TurboTax: Most popular for its simplicity and features.

• Wealthsimple Tax: Free with paid add-ons for extra features.

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Summary

Personal tax in Canada is key to financial planning and tax compliance. Know your taxable income, claim your credits and deductions and use tax optimization strategies to reduce your taxes and get bigger refunds. Get help from the CRA and tax software to stay informed and file accurately.

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