Disclaimer: Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.
The Canadian income tax system is progressive, meaning the more money you make, the higher your tax rate will be. The brackets are based on what province or territory you live in. However, they all follow a similar pattern. What are the tax brackets in Ontario, Canada? There are five different brackets that apply to people who earn any amount of income:
- 5.05% for the first $46,226 in income
- 9.15% on $46,226 to $92,454
- 11.16% on $92,454 to $150,000
- 12.16% on $150,000 to $220,000
- 13.16% for anything over $220,000
The rates may seem high, but there are various ways to lessen your taxes legally! Keep reading and find out how.
What Are the Income Tax Brackets for Canada?
The Canadian government collects two types of taxes: federal and provincial. Canada is among the countries with high tax rates. The Canada Revenue Agency (CRA) oversees tax collection and sets the tax rates. As of 2021, the federal tax rates are as follows:
- 15% on $13,809 to $49,020
- 20.5% on $49,021 to $98,040
- 26% on $98,041 to $151,978
- 29% on $151,978 to $216,511
- 33% over $216,512
If you reside in Canada and hit the $13,809 mark, that is when you become eligible for personal income tax, and that is just for federal income tax. You still have the provincial tax to compute. Canada is composed of ten provinces and three territories that have their own tax bracket. Earlier, you saw the provincial income tax brackets in Ontario, so you know that you start to pay provincial tax when you hit $46,226 or above.
|Federal Income Tax + Provincial Income Tax = Total Accumulated Tax|
Once you identify your federal and provincial taxes, add them together, and you will have the total income tax that you owe.
If you want to learn more about the Canadian income tax system, read How Does Income Tax Work in Canada: Comprehensive Answers to All Your Tax Questions, written by one of our CPAs here in Unloop.
Legal Ways of Reducing Your Tax Burden in Canada
Paying the federal and provincial income taxes may seem like a burden on your pockets. If you have an employer, CRA deducts taxes from your monthly salary, making things easier for you during tax season. In case you have your own business or you have other sources of income that should be declared in your tax report, you have to prepare the tax amount produced on tax preparation.
Although there are legal ways to go about reducing this amount, here's the catch. It is important to hire a bookkeeper or tax preparer who can help you reduce your owed tax legally.
This is when certain expenses can be deducted from your taxable income, which will lower what you owe the government. Some examples include childcare expense deductions for those with children under 18 years old, medical expenses above a specific threshold (this was over $11,138 in 2013), and charitable donations made throughout the year. Other personal deductions that you can involve in your tax report are:
- Accounting fees. When you hire an accountant or bookkeeper to prepare your income or business taxes.
- Car expenses. You can use a car loan to lessen your tax liability only if it's necessary for your employment duties, and you must complete form T2200 required by your employment contract. If you use the car or vehicle for business purposes, you can deduct parking fees, insurance, 407 charges, repairs and maintenance, lease costs, and capital cost allowances.
- Public transit amount. As a taxpayer, you are also eligible to claim the public transit credit for what you paid for monthly or yearly public transit passes. Such transportation includes ferries, streetcars, trains, buses and subways.
If you are a business owner, you can declare a capital loss, theft, and non-paying customers as they are legitimate tax deductions.
Registered Savings Plans
An RRSP is an account registered with the Canadian government that you can put money into to save for retirement. When it comes time to take some of your income out, this will not be taxed as much since only a percentage will be taken out, as it was already taxed when it went in.
Tax-Free Savings Accounts
These are similar to RRSPs, except that any interest earned on these accounts is tax-free! Also known as TFSAs, they have lower contribution limits than RRSPs but offer more flexibility by allowing withdrawals without penalties at any time within the year.
Business Expenses Deduction
This applies mostly if you own or operate a business from home, an office, and the like. Any expenses made through your company such as purchasing equipment or supplies, travel, and meals, can be deducted from your income. It is also a legal move to hire a family member like a spouse or child. However, keep their salaries reasonable and have some paperwork to prove that professional services were performed.
This is a more long-term strategy that should be considered in order to lessen the tax burden on your loved ones after you die. There are many different ways to do this, such as setting up trusts or gifting money and assets prior to death.
Contributing to your spouse's retirement account can reduce your tax liability, especially if there is an obvious gap in your income. Keep in mind that you will need a professional who can structure contributions acceptable for CRA.
Income splitting is another tax reduction strategy that works when some family members pay higher taxes than they should in order to reduce the family's gross tax level.
You can claim a number of costs such as transportation, utilities, realtor commissions, and storage fees if you move 40 kilometers or more to run your business or accommodate a new full-time job.
File Your Taxes on Time
In case you have other sources of income, or you are a business owner, make sure you file your income tax on time. Late filing is subjected to penalties, and according to the CRA website, there is a fine of 5% interest and 1% for the succeeding months.
|C A U T I O N|
Bookkeepers can play a vital role in tax preparation because they know the ins and outs of taxes. Not only that, they know the rules and regulations set by CRA and the tax laws. However, you have to be careful with the bookkeeper or accounting firm you hire as there are con-artists and scammers who pretend to be professionals.
You can ask for their license and see if they are registered in CRA's legitimate tax professionals and services database.
Remember that the tax brackets, like the income tax brackets in Ontario, are formulated to lower the tax you owe the government. Keep in mind that there are many legal ways to reduce the amount of income tax you pay each year. By taking advantage of some or all of these strategies, you could save yourself quite a bit of money! Consult with an accountant or financial advisor to see what would work best for you.