week 6 - income taxes

where does ur income tax go? how much of it?

- pays for gov and gov programs (public goods such as roads, healthcare, police forces,

and OAS)

- 1/3 of each dollar u earn goes to taxes

How is income tax structured and who administers it in Canada?

- Defined in the Income Tax Act (liek a rulebook)

- Based on a self-assessment system (you calculate ur own taxes)

- Administered by the Canada Revenue Agency (CRA)

• Understanding tax rules and regulations can help you

maximize after-tax cash

flows and net worth.

To help you cope with the many types of taxes you should:

- know the current tax loaw

- make discison that give u the best after tex xash flow and net worth (ur job, investment, purchasesetc)

- maintian complete tax records

what r the 4 types of taxes

taxes on...

1. purchases (sales tax & exise tax)

2. wealth (capital gains tax , estate admin fees)

3. property (perosnal property tax)

4. income/earnings

who has t file for taxes

- every resident of canada (lived her for 183+ days) w taxable income

- students should file even if they dont expect a return (so they can get GST credit, ontario trillium benefit and record tuition credits)

2 types of tax rates

- marginal tax rate (Rate of tax paid on the next dollar of taxable income)

- average tax rate (is the overall percentage of your income that goes to taxes. = total tax u paid/total income)

progressive income tax

the system in canada where Tax rate increases as taxable income increases

Progressive Tax System (2025) - how has this changed since 2022

income tax rates have decreases with time but simultaneously inflation and cost of living is increasing

- 14% on every dollar* you make under $57,375 then

- 20.5% on every dollar you make between $57,375

and $114,750, then

- 26% on every dollar you make between $114,750 and $177,882, then

- 29% on every dollar you make between $177,882 and

$253,414, then

- 33% on every dollar you make over $253,414

What is the T1 personal income tax form and what are its key parts

T1 = required personal income tax form (4 pages)

Key components: • Income • Deductions • Non-refundable tax credits

Income Tax Fundamentals

Total Income: Income from all sources

Net Income: Total income reduced by certain deductions.

Taxable Income: Amount of income (after allowable deductions) on which

income tax is computed

Basic Steps for Calculating Taxes

1. total income?

2. calc net income (after deductions to income)

3. calc taxable income (after addition deductios and losses carried forward from prior years)

4. calc federal taxes owing

5. adjust for tax credit

step 1: what makes up total income (4)

1. Employment income

2. Net business income

3. Investment income (dividends, capital gains)

4. Other income - retirement income, Old Age Security, child support

payments, education-related payments

step 2: how to calc net income

Net Income is total income reduced by certain deductions:

- Expenses to earned income (usually for investments or an unincorporated

business)

Contributions to pension plan or RRSP

Union and professional dues

Childcare expenses

Disability support deductions

Moving expenses* (if moving closer to job)

Interest on student loans

Other deductions - spousal and child support payments, employment

expenses

step 3: how to calc taxabl eincome

Amount of income (after allowable deductions) on which income tax is computed

Net income reduced by additional deductions and losses carried forward

from prior years:

Security options deductions

Capital gains deduction

Net capital losses of prior years

Other deductions

4: how to calc the federal taxes u own

apply the progressive tax rates (and tax credits) to your tabxable income

*this is where u find ur marginal tax rate and averge tax rate

Tax Credit (2 tyoes)

=amount subtracted directly from the amount of taxes owing

- Non-refundable tax credits are subtracted from the amount of taxes owed

but can never reduce federal tax below zero

- Refundable tax credits are refunded to individuals if they qualify even if

their tax liability is zero

how do u calc ur tax credit

Add ur tax credits up then multiply by 14% (lwest federal rate) to find the official amout of the tax credit

Example: $500 student loan interest → $70 credit (500 × 0.14)

what are the non-refundabel tax credits examples and

- Basic personal tax credit amount (amount of income you're automatically allowed to earn tax-free.) --> adjusted anually

- Personal tax credit amount for dependent spouse

- interest on student loans

- charitable donations and eligable medical expenses ** (calc differently)

dif bw tax deduction and credits

Deduction: Lowers your taxable income. Value depends on your marginal tax rate

Credit: Directly reduces your tax owed by a set % (e.g., $100 credit × 14% = $14), same amount no matter your tax bracket.

**so deductions r ussually better if ur not in the lowest tax bracket

how are charitbale donation tax credits

- non refundable

- first $200 tax credit at 14%

- $200 - (75% of income) tax credit at 29%

- Special tax credit at 33% available if you're in highest tax bracket

eligable mecical expense tax credits

Non-refundable tax credit

- Eligible medical expense minus the lessor of...

(1) 3% of net income or

(2) $2,759 in 2025

- Multiply 14%

note on investment income - how is interest, dividends and capital gains taxed?

- Interest Income: Taxed like earned income

(Eg. marginal tax rate is 26%, if you have $500 of interest income - Owe: $500 x .26 = $130)

- Dividends: Taxed at a lower rate than interest income, a tax credit is applied to reduce double taxation

- Capital gains: is Gain in value of your investment. Only 50% of the capital gain is taxed

(eg. marginal tax rate is 26%, if you have $500 in capital gains - Owe: $500 x .5 x .26 = $65)

what is withholding taxes

- when ur employer deducts an estimate of the tax u owe on ur income to send to the CRA for u so that by the end of the yr youve already paid most/all of income tax u owe

- this amount is shown on your T4 slip )annual income statement)

how do withholding taxes work for someone self employed

Must estimate their income tax on earnings and remit it to the CRA every 3

months

if marys total federal tax liability (after credits) is $26'000 and the had $25,000 with held how much does she owe? what if $30000 was withheld?

- she would only owe $1000

- she woul recieve a federal tax refund of $4000

what are the deadlines and penalties of tax payments

- must pay & file by April 30th

- can file later by june 15th if self-employed

- if late CRA charges an automatic 5% penalty on the amount you owe.

what is tax evasion vs tac planing

Tax Planning is the use of legitimate methods to reduce

one's taxes

Tax Evasion is the use of illegal actions to reduce one's

taxes

4 common tax plannign startegies

- maximize benfitd of deductions and credits

- tax deferal technique

- income spiltting technique

- tax shelters

how to maximize benefits of tax deductions and credits (9)

Know current tax rules

Everyone gets the basic personal amount

Use RRSP contributions to defer tax

Apply capital losses against capital gains

Claim eligible dependents

Claim student loan interest

Claim tuition & education amounts

Claim medical expenses

Claim charitable donations

what is tax deferral (why would u do this and what r examples

- Delaying when you pay tax to a future year

Saves money if your future marginal tax rate is lower

- Helpful if income will drop or you don't need all income now

ex.:

retirement (most common) , RRSP, employer pension plan, capital gains

what is income splitting

= shifting income to a family member who has a lower income so the family pays less tax overall.

**but canada has attribution rules to prevent ppl for juts "givign" income to someone else to avoid tax

so what r the legal ways to income split:

Registered Educational Savings Plan (RESP)

Retirement income splitting for retired, married couples ( retired couples can shift up to 50% of eligible pension income to the lower-income spouse)

what are tax shelters

something that lets you earn money and not pay taxes on it.

2 kinds:

1. Complicated/Risky Tax Shelters (not reccomended)

2. legit/ more safe:

- Gain on sale of primary residence,

- Profit on sale of family business (up to a certain limit),

- Half of capital gains,

- Income in a TFSA and FHSA is not taxed

Tax-Free Savings Account (TFSA)

a speciialized saving account that you can use the money and invest in stocks, etfs, gic's etc and any income u make you never have to pay taces on

Registered Retirement Savings Plan

(RRSP)

- designed tyo help u save for retirement

- any money u put into it can be deducted from ur total income (step 2)

- **however will have to pay tax later once u take it out but atp u prob in lower tax bracket

First Home Savings Account (FHSA) - when must u withdraw, contribution limit?

a combo of a RRSP and TFSA to help u save for ur first home

- contributions are tax deductible and withdrawls for a qualified property are tax free

- Money must be used within 15 years to buy qualifying residence, otherwise

can be transferred to your RRSP.

anual contribution limit: 8k

lifitime limit: 40k

**limits r so low bc of how favourable this account is

Non-registered accounts

Accounts with no special tax treatment or trust status

• Maximize your RRSP and TFSA contributions first

• Investment income is taxes as described earlier

How are scholarships, bursaries, grants, and RESPs taxed?

Scholarships, bursaries, fellowships, grants → not taxable

RESP has 2 parts:•

1. Contributions → not taxable•

2. non-contributions eg. EAP (Educational Assistance Payments) → taxable to the student

taxes for uni students: Tax-free income-tested benefits

- Ontario Trillium Benefit (OTB) → refundable tax credut to asist low income families

combines:

• Ontario energy & property tax credit,

Ontario sales tax credit •

Northern Ontario energy credit

- Canada/Ontario Child Benefits

- GST/HST credit → tax-free quarterly payment to offset sales tax for low/modest income earners

tuition tax credits

- For students 16+ in postsecondary education

Tuition fees reduce tax owed (non-refundable credit)

- Can carry forward indefinitely or transfer up to $5,000 to spouse, parent, or grandparent

- School provides a tax certificate with eligible tuition paid