You’ve probably heard some iteration of Benjamin Franklin’s famous quote about there being only two things in life that are certain: death and taxes.
As young students and grads, we all become familiar with one kind of tax, sales tax, at an early age. But it’s usually not until we’re out on our own for the first time that we have to start learning about income tax.
Personal income tax refers to the portion of what we earn that we give to Canada’s federal and provincial governments. It’s proportional to income and constitutes the Government of Canada’s main source of revenue. The Canada Revenue Agency (CRA) is responsible for overseeing our federal income tax program, which collects taxes on behalf of all provinces and territories except Quebec.
While it can be tough for students and grads to accept the fact that we don’t get to keep all of our hard-earned money, it’s important to think about what tax revenues pay for: they help to fund our healthcare and education systems, public works (such as our roads and infrastructure) and social services. The way taxes are allocated to these programs depends largely on who’s in government, but essentially, taxes keep our country running.
How do taxes work?
We pay taxes based on the amount of taxable income we’ve earned (total income less deductible expenses). Usually, your income tax will be deducted directly from your earnings and sent on to the CRA, though some employers will not do this automatically and you’ll have to independently remit your taxes to the government during or at the end of the tax year (April 30 for individuals who are not self-employed). The money you earn that you get to keep is called your after-tax income.
Every spring, Canadian residents have to file a T1 Tax and Benefit Return. It’s basically a report you file with the CRA to tell them how much you earned in the previous calendar year (through working, monetary awards, profits you’ve made on investments, etc.). The CRA compares the return you file with their records of what you reportedly earned during the year in question and then calculates how much tax you owe. They will either contact you to let you know how much you still owe, or they will provide a refund if you overpaid during the year.
How much tax do we pay?
In Canada, we only pay taxes on our taxable income – our total income less any allowed expense (like contributions to a Registered Retirement Savings Plan (RRSP) and childcare expenses, for example). This gives us you your net income, or “tax payable before credits”. Each year, the CRA sets the tax rates (as percentages) for four tax brackets and Canadian residents pay taxes based on which bracket they fall into.
Before we finally pay our taxes, we can get non-refundable tax credits deducted from our taxable income, for things like contributions to a government pension plan, employment insurance premiums, tuition, textbook and education costs and medical expenses. The government also gives tax credits for some donations to encourage people to give generously to registered charities.
To give you a sense of how much federal tax we pay, these are the rates the CRA has set for returns filed in 2014 (for income earned in 2013):
Bracket Income Range Tax Rate
- Bracket 1 $0 – $43,953 15%
- Bracket 2 $43,953 – $87,907 22%
- Bracket 3 $87,907 – $136,270 26%
- Bracket 4 Over $136,270 29%
These rates do not include what we pay in provincial/territorial taxes, which are calculated separately but collected by the CRA the same way as federal taxes. For current provincial/territorial tax rates, you should check out the CRA website.
Are there exceptions for taxed income?
In addition to the tax-deductible expenses mentioned above, there are also certain types of income that are not taxed. Gifts and inheritances, lottery winnings or profits on the sale of your home are examples of kinds of income that are exempt from taxes in Canada.
The government also does not charge taxes on some of the “benefits” it offers, namely the Canada Child Tax Benefit, GST/HST credit and Working Income Tax Benefit. These programs are designed to help families raising children under the age of 18, offset GST or HST paid by individuals or families with low or modest incomes and give tax relief to low-income individuals and families in the workforce, respectively. One of the upsides of filing a tax return is that you may discover you’re eligible for one of these benefits!
How do I file a tax return?
Filing a tax return is usually less painful than it sounds, especially if you’re just starting out and you don’t own any property. Between January and March each year, you’ll receive a T4 from your employer, as well as other official records of any money you earned the year before. You will also receive receipts for any tax-deductible charitable donations you made and should be able to download any documents you need for other tax-deductible expenses, like a Tuition, Education, and Textbook Amounts Certificate (T2202A) or a Transit Usage Report for the Public Transit Tax Credit. I suggest that you keep all of your tax documents in a folder or envelope until you’re ready to file your return.
You’ll then be responsible for filing a tax return by April 30 (June 15 if you’re self-employed). The first few times you do this, it’s not a bad idea to get a bit of help – whether you ask a parent or guardian to walk you through the process or you take your taxes to somewhere like H&R Block (they offer a special student price of only $29.95, plus they’ll give you a free Student Price Card. It’s a great deal if you can spare the cash!).
If you feel comfortable doing it on your own, I highly recommend filing your taxes online using software like TurboTax, because it’s super simple and easy to use. It’s also fairly cost-effective and if you’re a student or you earned $20,000 or less in the year you’re filing for, they’ll let you file for free!
It’s also a good idea to sign up for direct deposit with the CRA. You can do so online, by mail or by phone. It only takes a few minutes and you’ll never have to worry about taking a government cheque to the bank again. You can learn more about signing up for direct deposit here.
Congratulations on taking the first step to getting a basic understanding of personal income tax in Canada. Be sure to check out my other articles for more information and tips on money management.