Your 101 on How Canadians Are Taxed
December 14, 2022
The time is now to take a look at your tax liability for 2022! It’s almost year-end and you know that you should take opportunities to reduce your tax burden for the year, but where do you start?
Individuals who reside in Canada are taxed on the worldwide income they receive in the 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 2022 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 Bracket||Rate|
|Up to $50,197||15.00%|
|$50,198 – $100,392||20.50%|
|$100,393 – $155,625||26.00%|
|$155,626 – $221,708||29.00%|
|$221,709 and over||33.00%|
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 $50,197, then the rate increases to 20.50% for income above $50,198 etc. Once your income is over $221,709, 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.
So, how can you reduce your income tax liability?
First, you can be intentional about the types of income you receive. 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 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).
Second, there are certain expenditures that you can deduct from your income and tax credits that can reduce your tax liability. The CRA’s website has a page that describes the deductions and tax credits that are available. 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. The most common credits are for medical expenses, charitable donations and tuition fees. Act now, as the payments related to these deductions and credits must be made before December 31, 2022 to reduce your tax liability (except for RRSP contributions which can be made until March 1, 2023 while still being applied to the 2022 tax year).
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.
To get an estimate of your income tax liability for 2022, consult this tax calculator.
Also, have a look at these year-end tax checklists to help minimize your 2022 tax liability:
PWC: A planning checklist for individuals and owner-managed businesses.
E&Y: Part 1 - News and information on timely tax topics – November 2022.
E&Y: Part 2 - News and information on timely tax topics – December 2022.
KPMG: 2022 year-end personal tax planning tips
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.