Canadian Taxes 101: What You Need to Know
Taxes: only the largest expense you’ll ever have
As soon as I mention the word taxes, I can hear the air seep out of the room. The faces of my students go from somewhat interested (we are talking about personal finance after all) to completely disinterested. Let’s face it, taxes are not sexy. They pale in comparison to talking about yolo’ing about stocks (which is foolhardy in my opinion) and which discussing meme stock is mooning it next. Nevertheless, taxes, like them or not, are the largest expense we all are responsible for. Although for some, the correct (legal may I add) strategies can help mitigate, defer, and reduce their tax burden, so they keep more of that hard/smart earned money. Why just earn more, when you can keep more as well, and with less effort in some cases might I add?
I’ll be referring to another very informative and timely article by Edward Jones and will make references to how it will affect us, healthcare professionals.
Tax Terms 101
Total/Gross Income: “Also known as gross pay when it’s on a paycheck—is an individual’s total earnings before taxes or other deductions. This includes income from all sources, not just employment, and is not limited to income received in cash; it also includes property or services received.” 1
Net Income: “Net income is the total residual amount of income remaining after all personal expenses have been paid for. Personal net income is calculated as the total amount of revenue earned less the total amount of personal expenses.” 1
Tax Deduction: “A tax deduction is an amount that you can deduct from your taxable income to lower the amount of taxes that you owe“ 2
Tax Credit: “Refers to an amount of money that taxpayers can subtract directly from the taxes they owe. This is different from tax deductions, which lower the amount of an individual’s taxable income.” 3. There are two major types of tax credits: non-refundable and refundable.
Non-Refundable Tax Credit: can reduce the tax you owe to zero, but they don’t provide refunds.3. In other words, non-refundable tax credits can potentially reduce your taxes owing to $0 but have no value beyond that – any additional amount remaining is not paid to you.
Refundable Tax Credits: are paid out in full, providing a refund for any remaining tax credit amount beyond zero tax due 3. Refundable tax credits can result in a refund if your income tax owing has been reduced to $0 and there is still a credit remaining.
Write-Offs: There is definitely some confusion about this. A write-off is the same as a tax deduction. There are used interchangeably. However, some may assume that a write-off (i.e an advertising and promotion expense) will constitute a refund. For example, writing off $100 worth of business cards does not equate to receiving $100 back in a tax refund. Instead, it means you can deduct $100 of your income (because it is an eligible expense), and therefore your marginal tax bracket will affect a smaller amount. Not sure what a marginal tax bracket/rate is, Wealthsimple outlines it both federally and provincial/territorially.
Let’s roll this into a scenario that is all too familiar to some of us.
Scenario 1: Employee
Working as a physiotherapist in the public healthcare sector. Your annual gross (total) income is $60 000. Your net income (income minus eligible expenses) is $55 000. Your taxable income in this scenario is $55 000. Those $5000 of expenses were deemed tax deductions and you were able to subtract that (deduct them) from your total income.
Now if you fast forward and realize that you owed $2000 in taxes (over and above what is deducted each paycheck-remember as an employee what you receive each paycheck is your net income after all source deductions are considered) and you received a $2500 nonrefundable tax credit. Your total taxes owing would be $0 ($2000 owing minus the tax credit of $2000- the other $500 portion of that credit defaults because it is a nonrefundable credit. If however, that $2500 was deemed a refundable tax credit, not only would you not be owning anything in taxes, but you would also receive a refund of $500!
Scenario 2: Self-Employed
Working as a physiotherapist in the private healthcare sector. Your annual gross (total) income is $60 000. Your net income (income minus eligible expenses) is $45 000. Your taxable income in this scenario is $45 000. Those $15000 of expenses were deemed tax deductions and you were able to subtract that (deduct them) from your total income. This has dropped you into a lower tax bracket and therefore reduces your tax burden based on that marginal tax rate.
Now if you fast forward and realized that you owed $2000 in taxes and you received a $2500 nonrefundable tax credit. Your total taxes owing would be $0 ($2000 owing minus the tax credit of $2000- the other $500 portion of that credit defaults because it is a nonrefundable credit. If however, that $2500 was deemed a refundable tax credit, not only would you not be owning anything in taxes, but you would also receive a refund of $500!
Scenario 3: Incorporated
Working as a physiotherapist in the private healthcare sector. Your corporate annual gross (total) income is $60 000. Your corporate net income (income minus eligible expenses) is $45 000. Your corporate taxable income in this scenario is $45 000. Those $15000 of expenses were deemed tax deductions and you were able to subtract that (deduct them) from your total income. The difference in this example is that the corporation is a business entity, separated from you as the individual. Your corporation can either hold that full $60 000 that it earned, or it can decide to pay you (as the shareholder) an amount so you can meet your personal financial obligations. This can be done in two ways, as a salary or a dividend (each has its own tax considerations). The money that is provided to you personally will be taxed at the personal marginal tax rate and the money that is left inside the corporation is taxed at the corporate tax rate. I will speak more to the question about incorporation and what my experience has been like in a later article. So stay tuned.
Common 2023 Tax Credits
The following credits are taken directly from the Canada Revenue Agency
Basic personal amount: $15 000 – Every individual who is a resident of Canada and has an income of less than $165,430 can claim an amount. Partial claims available to those with income higher than $165 430
Age amount: $8396 – Available to those who will be 65 or older on December 31, 2023, with a net income less than $42 335. (Reduced amounts available for higher incomes).
Pension income amount: $2,000 – Those receiving regular pension payments from a pension plan or fund (excluding CPP, QPP, OAS, or GIS) may claim the lesser of $2,000 or annual pension received. The pension income amount is also available to individuals age 65 or older receiving regular income from an RRSP or RRIF.
Spouse or common-law partner amount: $14,398 – Available to those who support a spouse or common-law partner with no income. Income between $1 and $14,398 results in a partial claim. The additional amount is available if the spouse or common-law partner is infirm.
Tuition amount (full-time and part-time students): Individuals may claim the total amount of tuition fees paid at a qualifying institution.
Disability amount: $9428– Available only to those who qualify for the Disability Tax Credit.
Medical expenses: You can claim a range of medical expenses, including prescription drugs and dental services, which must exceed a certain threshold before becoming eligible for deduction.
Tax Calculator
Call me a super nerd but I love to geek out on tax calculators to help me plan for my tax burden throughout the year. This allows me to identify a rough estimate of what I am owing so I can allocate the difference to investments or travel. Ernest and Young have a free calculator that I use often for both personal and business/corporate taxes.
✅ Know the Basics
Taxes are the largest expense we will have throughout our lifetime, especially here in Canada versus other jurisdictions. Please do yourself and your future self a favour, learn and understand the basics now. Don’t push it off and hope it all works out in the end.
✅ Find Professional Help
Yes, there is a time and a place for taking your shoebox full of receipts over to your local franchised tax firm. That’s usually reserved for those individuals with a simple and basic filing, likely new graduates. If your situation is a bit more complex or if you anticipate it will be more complex (switching jobs, opening a company/business) in the future, then it may be advisable to seek out actual professional, tailored assistance; in the way of hiring an accountant. When I search for professionals I look for three main attributes, age, experience, and vision.
Age, the last thing I want to do is invest in a person and divulge my goals/visions and plan to have them retire in two years and for me to start over again.
Experience is not the same as age, sure the older you are you tend to gain experience, however not always the case. We all know of many friends/colleagues who have worked twenty years experience (but that’s twenty, one-year experience) because they have mailed it in after one year of learning. I look for professionals who have experience in my particular field.
Vision, my businesses are not static, they are constantly growing, shrinking, and evolving. I need to make sure my team understands where I want to go and is in alignment with that, if not I will outgrow them and have to restart again.
Want to learn more about taxes?! Haha writing that sentence makes me laugh as I know the response most people will have to that.
An underwhelming 'no'.
For those keeners who said YES. You can catch a FREE prerecorded webinar that I held alongside my accountant of many years, Kevin Mouscos last year hosted on Embodia.
