The After-Tax Effect
16 Taxes: The Mammoth Price Tag
Anne Lee
Bills, bills, bills!!! There always seems to be a never ending cycle of invoices due. In Chapter 2 – The Money Mindset we discussed categorizing expenses between needs, wants, and savings. It was suggested to allocate 50% of expenses to needs, which is a significant amount of the budget and covers items such as accommodation, food, and transportation. Rent, groceries, and vehicle costs are usually thought of as the most expensive items to individuals. However, taxes are probably an individual’s largest expense and as such should receive heightened attention. In future chapters we will discuss apprentice tax credits and tax advantaged accounts. Our objective in this chapter is to build an understanding of how the Canadian taxation system affects you. We have listed some of the common types of taxes that individuals are subject to.
Income Tax
- Relates to the taxes owing primarily on earnings. Individuals calculate the income tax owing to Canada Revenue Agency (CRA) each year on an Income tax and benefit return (T1). The amount of income tax to pay depends on your income during the year and the tax credits you have available to claim. A separate federal and provincial or territorial tax calculation is made. In some provinces, the top tax bracket combined federal and provincial tax rate is greater than 50% of earnings.
Sales Tax
- Relates to taxes paid on most goods and services purchased. In Canada, 3 different types of sales tax exist: goods and services tax (GST), provincial sales tax (PST), and harmonized sales tax (HST).
Property Tax
- Municipal (local) governments calculate these taxes based on the value of land and buildings.
Custom Duties and Tariffs
- These taxes are charged by the federal government on certain imported and exported products.
Health Services Taxes
- Provinces and territories are responsible for managing their own health care system. Some provinces/territories charge additional amounts to access these services.
These are some of the taxes that individuals regularly pay during the course of a year. The percentage of these taxes surmount to a significant portion of gross earnings.
Example: Determination of Taxes
Amber has received her Red Seal Endorsement and is working as an Automotive Service Technician in Prince Edward Island. Amber works full-time with an annual employment salary of $80,000 as issued on her T4 slip. Amber has a single family home in Charlottetown, PEI, which is assessed at $450,000 and subject to 1.5% property tax annually. During the year, Amber also incurred the following expenses not including taxes:
- Meals (15% HST) $2,600
- Non-alcoholic beverages (15% HST) $1,000
- Goods & Services subject to HST $ 12,000
- Shipped goods from outside Canada (18% Duty, 15% HST) $ 800
- Fuel (30% fuel taxes) $6,000
Amber will have the following approximate taxes:
- Federal Tax $10,262
- Provincial Tax 8,540
- Canada Pension Plan (CPP) 3,755
- Employment Insurance (EI) premium 1,002
Total Employment Income Taxes $23,559
Total Income Taxes (% of gross income $80K) 29.45%
- Property Tax @ 1.5% assessment $6,750
- 15% HST on meals 390
- 15% HST on non-alcoholic beverages 150
- 15% HST on goods & services 1,800
- 15% HST on shipped goods 120
- 18% duty on shipped goods 108
- 30% fuel taxes 1,800
Total Other Taxes $11,118
Total Taxes $34,677
Total Taxes (% of gross income $80K) 43.35%
Amber will pay $34,677 of taxes during the year, approximately 43.3% of her gross employment income.
Links to a few tools to assist in estimating amount of income taxes owing
- Wealthsimple
- EY Personal Tax Calculator
- Turbo Tax – Canada Income Tax Calculator
- TaxTips.ca – Canadian Tax & RRSP Saving Calculator
With tax commonly Canadian’s largest expense, it is essential to have an understanding of the Canadian income tax system on route to a journey towards financial freedom.
“It’s not how much you can make, but how much you can keep.”
Familiarity of tax laws and tax planning strategies can assist one in minimizing their tax liability legally. Being able to keep more of one’s gross earnings allows one to have the ability to save more, set realistic financial goals, and take advantage of tax-efficient options. This, in turn, will allow one to accumulate a growing wealth of assets over time, accelerating the road towards financial independence.
agency that administers tax, benefits, and related programs to ensure compliance on behalf of governments across Canada, thereby contributing to the ongoing economic and social well-being of Canadians
the Canadian tax return that individuals complete every year to calculate whether they owe tax on their income. A return must also be completed and submitted to Canada Revenue Agency to receive federal and provincial or territorial benefits and credits.
amounts that help reduce the taxes that you owe
