Understanding Local Taxes in Canada—What You Need to Know

Posted January 6, 2022 by in Lifestyle
Canadian flag waving in wind

Canada’s tax system is one of the most confusing. There is a lot to cover, from the tax brackets to the tax season dates and required paperwork. 

Income Tax Brackets in Canada

Canada has a marginal tax rate at the provincial and federal levels. Below are the most recent federal tax rates:

• 15% on the initial $49020 of taxable income

• 20.5% on the portion of taxable income between $49021 and $98040

• 26% on the portion of taxable income between $98041 and $151978

• 29% on the portion of taxable income between $151978 and $216511

• 33% of taxable income over $216511

The above are tax rates on the federal level. However, you must also pay taxes to the province you dwell in and the federal taxes. Below is a guide to the provincial tax rates;

• 5.05% on the initial $45142 of taxable income

• 9.15% on the next $45145

• 11.16% on the next $59713

• 13.16% on the amount over $220000

The fact that you must pay federal and provincial taxes may seem like a lot. However, you must understand that the tax increases for additional income earned in a specific bracket. Therefore, you will pay more taxes if you make more money, and vice versa. 

The Tax Season

In Canada, the tax season starts in late February. However, the filing deadline depends on your profession. Most professions must file before the end of April. There are numerous things to do between late February and April. Other important tax-related dates in Canada that you should know of include:

• 1st March- The deadline for RRSP contribution

• 28th February- The last date for employers to issue T4, T4As, and T5s. 

• 30th April- The deadline for individual filing and the balance-due deadline for individuals and the self-employed

• 15th June- The filing deadline for self-employed people

For most people in Canada, the most important dates are 1st March and 30th April. While the authorities have given people plenty of time to get their tax affairs sorted, most of them wait until the last minute to file. Self-employed people get more time to file. However, they must pay their outstanding balances before 30th April. Therefore, since it is impossible to calculate how much you own before filing, it means that you must get things done by the 30th. 

Documents Needed for Filing Taxes in Canada

Canada demands its citizens to produce specific documents when filing their taxes and completing their tax-related duties like any other nation. Most people dread the tax season because they have to gather many documents. 

Below is a list of documents you need to file your local taxes in Canada:

• A Social Insurance Number

• Any income T-slip, like T4 and T5

• Records of additional work like freelance work and foreign income

• Tax receipts for deductions, like charitable donations and medical expenses

• RRSP contribution slips 

• Repayments for Home Buyers Plan 

• Lifelong Learning Plan

• A tax package (it is usually sent to you with your netfile access code)

Gathering these documents at the last minute can be challenging. Therefore, the trick is to set up a physical or electronic folder with all the necessary documents. You can keep adding the documents in the folder as you get them. Doing this will help you not lose track of the documents. 

As the tax season approaches, you can start making inquiries about the documents you do not have to avoid the last-minute rush. When gathering the necessary documents, most people forget about the records of additional income. Having all your documents prepared early can help you start the filling process early. 

Remember, the earlier you file your taxes, the faster you get your tax refunds. 

How to File Taxes in Canada

The Canadian process for filing taxes has become less complicated. You can do this electronically or by hand. There is certified tax software you can use to simplify the process. The program you use depends on you. Some are paid, and others are free. The software will guide you through the process and prompt you about what you may have missed. 

Tools like the Quebec tax calculator also come in handy. While the software simplifies the process, some people still find filing taxes intimidating. If this is the case, you can always hire a tax preparer or accountant to handle the load. 

Understanding What RRSP Contributions Are About

One of the first things you must do during the tax season in Canada is RRSP contribution. This requires RRSP contribution slips. Therefore, it would be wise to cover the concept. RRSP contributions allow you to enjoy a tax break. What happens is this; if you earn an annual salary of 50000 and contribute ten percent of it to your RRSP, then your taxable income is 45000. 

Thus, you will get back any excess taxes you have paid on the RRSP contributed portion of your income when you file your taxes. Also, any income you acquire from your RRSP investments is not taxed. 

However, this is not permanent. The money will be taxed when you withdraw it. This does not take away from the RRSP tax benefits as most people only withdraw in their retirement years. During retirement years, your income is usually lower. Therefore, you pay fewer taxes. 

Below are some important facts about RRSP contributions that you should understand:

• Your RRSP contribution limit depends on your prior year’s income

• You cannot claim RRSP contributions in your first year of filing 

• Any unutilized RRSP contributions are normally carried forward 

It is also worth mentioning that the 1st March deadline for RRSP contribution is usually for the previous tax year. This means that if you wish to make contributions and claim them in the previous year, you must do it before 1st March. 

Tax Deductions You Should Not Miss

Canadian law allows its citizens to claim various deductions. However, most people do not realize it. They end up paying more than they have to. Below are some of the most commonly missed tax deductions:

• Medica and moving expenses

• Charitable donations

• Childcare expenses

• Student loan interests

Work from home expenses

The most commonly missed tax deduction in Canada is medical expenses. Work from home expenses is also commonly missed. Since the pandemic’s beginning, many people have been forced to work from home. 

At the moment, every individual can claim up to $400 in work from home expenses. While some of these deductions may not seem like a lot, they amount to some substantial when they are added up. 

hand holding Canadian money

It is worth mentioning that the tax rules, deductions, and requirements can change annually. 

Therefore, before every tax season, it would be wise to research and look out for new policies that can affect you. Personal tax can also differ depending on the province and territory.