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Your 101 on How Canadians Are Taxed

The time to file your 2023 personal income tax return is just around the corner. Need a reminder about how Canadians are taxed… read on.

Individuals who reside in Canada are taxed on the worldwide income they receive in the calendar year. There is a federal layer of tax and a provincial layer of tax. The tax rate you pay depends on the amount of taxable income you received in the calendar year and the tax brackets you fall into. The 2023 Federal tax brackets are shown in the table below (which are indexed each year for inflation). Each province also has its own tax brackets and rates.

Federal Tax BracketRate
Up to $53,35915.00%
$53,360 – $106,71720.50%
$106,718 – $165,43026.00%
$165,431 – $235,67529.00%
$235,676 and over33.00%

As you can see, the rate you pay will be a blended rate depending on your taxable income for the year. You pay Federal tax at 15% on the first $53,359, then the rate increases to 20.50% for income above $53,359, etc. Once your income is over $235,676, then every dollar after that will be at the 33% Federal tax rate. With provincial taxes added on, the top combined income tax rate ranges from 44.50% in Nunuvut to 54.80% in Newfoundland and Labrador. Check out these links for the combined Federal and Provincial tax rates for the province in which you reside: E&Y(rates and a personal tax calculator), KPMG (tax rates and brackets), as well as this easy-to-use Tax Calculator. There is an alternative minimum tax (AMT) that could apply if you have certain preference items. A taxpayer pays the higher of AMT and regular income tax. There are changes to the AMT for 2024, outlined in this article Alternative Minimum Tax Changes – What You Need to Know.

Some types of income are more tax efficient than others. If you earn capital gains, only 50% of the gain will be included in your taxable income, while your employment and investment income will be fully taxed. Withdrawals from your RRSP or RRIF are also fully taxable. Dividends receive preferential tax treatment through the use of the dividend gross-up and tax credit. There are two types of dividends: eligible and non-eligible dividends. Non-eligible dividends are taxed at a higher rate than eligible dividends. Usually, dividends you receive in your investment portfolio would be eligible dividends (dividends from publicly traded securities). While preparing your 2023 tax return, review the types of income you earned and evaluate if you should make a change to the types of income you are receiving. However, don’t let the taxation of the income be the only reason for changing an investment. Talk to an Advisor to help match your income to your planning goals.

Certain expenditures are deductible from your income and there are also tax credits available that can reduce your tax liability. The CRA’s website has a page that describes the deductions and tax credits that are available. To be applied to your tax return, the expenses must have been incurred by December 31 of the tax year in question (except for RRSP contributions which can be made 60 days after year end and still reduce the prior year tax liability - so for the 2023 tax year, RRSP contributions can be made up to February 29, 2024). For employees, there are less deductions than for those who are self-employed. The most common deductions are for RRSP contributions, childcare expenses, capital losses and investment related expenses. New for 2023 is the first home savings account (FHSA). The contribution limit for this account is $8,000 and is tax deductible. For more information on how this account works, consult CRA’s First Home Savings Account page. The most common credits are for medical expenses, charitable donations and tuition fees.

Of course, there are also ways to save taxes on income in the long-term by investing in a tax-free savings account (TFSA) or registered education savings plan (RESP), for example. While contributions to these types of plans don’t result in a deduction on your tax return, the income earned in the plans are not taxable while in the plan. For TFSA, there is no tax to you on withdrawal. For RESP, the funds are taxed in the hands of the student. The TFSA contribution limit for 2024 is $7,000. If you have not made a TFSA contribution in the past, the contribution room carries forward. For example, if you were 18 years or older in 2009 and have never contributed to a TFSA, you could contribute $95,000 to a TFSA in 2024. For more information on how TFSAs work, read How to Use a TFSA to Get Better Investing Results and for more information RESPs, check out Getting the Most from Your RESP, SMART TALK… about registered education savings plans (RESPs) and this Start Education Planning Now calculator.

Now is also an opportune time to review your overall financial and estate plan which would include your wills, power of attorney and representation agreements, life insurance needs as well as critical illness and disability insurance.

Contact us to learn more or if you have any questions.