Breaking Down Canada’s Tax Brackets When going through tax planning for the year, it is important to understand Canada’s Tax Brackets so you are able to budget accurately. Keep in mind that your income tax considers income from all sources that are taxable. Once you know what your total income is, it is time to reference how much you will pay in income taxes. This is done by verifying the tax bracket you fall into federally and provincially. In Canada, we have a graduated income tax system which means that people with a lower income pay a lower tax rate than those with a higher income. Your taxable income is the total income you earn minus allowable deductions and exemptions such as education and medical. For self-employed individuals, expenses reduce your taxable income as well. Canada’s Tax Brackets for Federal Income Tax 2021 Federal Income Tax Brackets 2021 Federal Income Tax Rates $49,020 or less 15% $49,020 to $98,040 20.5% $98,040 to $151,978 26% $151,978 to $216,511 29% $216,511 or more 33% Keep in mind that this is in addition to your provincial income tax bracket. The calculation of your income tax keeps the rate per amount of income you earn. In other words, you pay each tax rate for each bracket you surpass. For example, if your taxable income in 2021 was 0,000: You pay 15% on the first $49,020. Then, you would pay 20.5% on the amount between $49,020 to $98,040. Finally, you would also pay 26% on the amount from $98,040 to $110,000. To summarize, your federal income tax would be calculated as: The first $49,020 would incur $7,353.00 in federal income tax. From $49,020 to $98,040 of your taxable income, you would pay $10,049.10. The final $11,960 of your taxable income would result in $3,109.60 of federal income tax. This ends up with $20,511.70 in federal tax. Your employer may have already deducted most, all or less than this amount which is why you may have to pay when filing or get a refund. If you haven’t already paid tax on the income, expect to pay it when you file your return based on your total taxable income. Canada’s Tax Brackets & Other Rates to Consider Now you may be wondering, what is the actual rate of federal income tax being paid if it is broken out like this? Average Federal Tax Rate Well, one measure can be your average federal tax rate. To get this rate, divide your total income by the total tax you pay. Going back to the example above, here’s what your average tax rate would be in 2021 based on a taxable income of 0,000: $20,511.70 / $110,000 = 0.18647 or 18.647% Total Federal Income Taxes Paid / Total Taxable Income = Average Tax Rate Thus, 18.647% would be your average tax rate. Marginal Federal Tax Rate Your marginal federal tax rate is the tax rate you will pay on anything earned above your current total income. If you take the example above again and your taxable income is 0,000, then your marginal federal tax rate is 26% until you earn more than 1,978. This changes when you earn more than $216,511 to 33%. Another way to explain this is that for every dollar above your taxable income of $110,000, you will pay 26% in federal income tax. If you still want more information or want to understand how this applies to you, contact us. For reference you can always check out CRA’s website and their article on federal income tax here.
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The Canada Child Benefit and Eligibility The Canada Child Benefit or CCB is a non-taxable amount that is paid monthly for families with children under the age of 18. On top of that, there is a Child Disability Benefit which you may be eligible for. When you apply for the Canada Child Benefit, your children are also registered for the goods and services tax or harmonized sales tax (GST/HST) credit, climate action incentive payment (CAIP), and any other related federal, provincial and territorial programs that the CRA offers alongside it. Eligibility for the Canada Child Benefit You must be living with the child. They must be under 18 years of age. You must be primarily responsible for the child’s care and upbringing. You must be a resident of Canada regarding tax purposes. You or your spouse (or common-law partner) must be: A Canadian Citizen A Permanent Resident A Protected Person A Temporary Resident This means you have lived in Canada throughout the last 18 months and have a valid permit in the 19th month. Registered or Entitled to Register Under the Indian Act Ideally you should apply when your child is born, lives with you or when a new shared custody arrangement begins. Calculating the CCB Amount The calculation of your CCB amount is based on: Number of Eligible Children Ages of Eligible Children Adjust Family Net Income (AFNI) for the Last Tax Year Eligibility for the Disability Tax Credit (DTC) The CCB is currently calculated as: $6,997 per year for each eligible child under the age of 6. This translates to $583.08 per month. $5,903 per year for each eligible child aged 6 to 17. This comes to $491.91 per month. To find out more information on the Canada Child Benefit or CCB, visit the CRA’s website for a CCB calculator and more information via this link: Canada Child Benefit Overview by the CRA
Filing an Appeal to the Tax Court of Canada If in the case that an income tax or GST dispute needs to be resolved, first send a notice of objection to the Canada Revenue Agency (CRA). They will review the notice and attempt to resolve it with a reassessment, confirmation or redetermination. At this point, if you still do not agree with the decision made by the CRA, you can appeal to the Tax Court of Canada. The Tax Court of Canada is independent as a court of law and conducts regular hearings across Canada. There are two distinct procedures that appeals are heard through and more information can be found on the Tax Court of Canada‘s website. Time Limit to Appeal to the Tax Court of Canada When you get the notice of confirmation, reassessment or redetermination from the CRA, there is a 90 day time limit to file an appeal to the Tax Court of Canada. Alternatively, if the Canada Revenue Agency has not issued a decision within 90 days from the filing of the income tax objection or 180 days from the GST/HST objection, you can still file an appeal. COVID-19 brought forth the Time Limits and Other Periods Act which allowed for the temporary extensions to some of the cases which exceed the regular appeal deadlines. Procedures in the Tax Court of Canada Informal Procedure The informal procedure minimizes and simplifies the legal steps in an appeal process. There are no filing fees and applies to those appeals in the Tax Court of Canada under the Income Tax Act as well as the Excise Tax Act. When considering income tax appeals, the Informal Procedure is limited to cases in which amounts of federal tax and penalties in dispute for each taxation year excluding interest is ,000 or less. Other than that, it applies to cases where the loss in question is $50,000 or less regarding GST appeals. Even if the amounts in the objection exceed the limitations but the tax payer filing the appeal wants to go ahead with the informal procedure, this is still possible. They must state it in the Notice of Appeal that there is an agreement to limiting the appeal to either $25,000 or $50,000. 3 Classes in the General Procedure Class A Amount in issue is less than $50,000 Appeals in which amount of loss is determined to be less than $100,000 Filing fee is $250 Class B Amount in issue is between $50,000 and $150,000 Appeals in which amount of loss is determined to be between $100,000 and $300,000 Filing fee is $400 Class C Amount in issue is more than $150,000 Appeals in which amount of loss is determined to be more than $300,000 Filing fee is $550 When appealing through the General Procedure to the Tax Court of Canada, it is possible to represent yourself or be represented by a lawyer. Corporations must be represented by a lawyer. How to File an Appeal to the Tax Court of Canada To start filing your appeal, mail or deliver your Notice of Appeal to a Tax Court of Canada Office or send it by fax. Additionally, it is possible to use the Tax Court of Canada’s Electronic Filing and is available through their website. Missing a deadline to file an appeal requires an application to the Tax Court of Canada for an extension of time to appeal. Regarding income tax and GST/HST appeals, you have one year and 90 days to apply. This is from the date of confirmation, reassessment or redetermination by the CRA. To qualify for the extension, it must be demonstrated that: You could not appeal or have someone else appeal for you within the appeal period. You intended to appeal within the appeal period. It is fair to grant the application. You applied as soon as you could. There are reasonable grounds for appealing. To find out more information, check out the CRA’s page on Filing an Appeal to the Tax Court of Canada by clicking the link here.
Why File Your Tax Return with a CPA? The governance of the CRA-CPA Canada Framework is done by an overarching steering committee. They manage they relationship between the CRA and CPA Canada to provide high level guidance and direction to tax related committees. Thus filing a tax return with a CPA is the safest and most accurate way to do so. There are seven committees in total and consist of the following headings: Services Compliance Tax Administration Scientific Research & Experimental Development Commodity Tax Red Tape Reduction Training Service Committee Provide enhancements to the existing CRA services and operations Receives input on forms, publications and programs that are still early in the development cycle Provide continuous feedback on tax administration for the CRA Scientific Research & Experimental Development The SRED committee enhances existing Scientific Research & Experimental Development services and operations They also receive input of SRED forms and publications still early in development Red Tape Reduction Committee The Red Tape Reduction refers to the committee that identifies red tape burdens for taxpayers and provides solutions They also provide feedback on CRA’s red tape reduction deliverables Compliance Committee They provide feedback on the audit process Additionally, they receive input on how the process for taxpayers to comply can be easier Work with each other in regards to issues that are of national interest This includes the underground economy, aggressive tax planning, offshore activities and CPA Canada’s “privilege” request Tax Administration Committee This committee identifies situations where administrative provisions are considered to get to tax policy objectives Produce possible solutions to obtain tax policy objectives Commodity Tax Committee Identify possible enhancements to existing commodity tax services and operations To receive input on commodity tax forms, publications and programs still early in development This is also a source of feedback on commodity tax administration for the CRA Training Committee The training committee is there to consider and identify synergies related to training programs offered by the CRA and CPA Canada. They also recognize CRA experience for the CPA Canada professional designation accreditation. In addition, they offer the tax audit training to university curriculums. Filing Your Return with a CPA Considering how closely the CRA works with CPA Canada, it is clear that a recognized CPA representative will be able to offer the highest level of service in the market. Filing a tax return with these professionals will provide much more confidence that the information you are conveying to the CRA is an accurate representation of your tax situation. Speak to us today to start filing your business, personal or trust taxes with our certified CPA’s. Learn more about the CPA’s who work with the CRA via this link: Click Here to Find Out More About CPA-CRA Committees for Tax Governance
How Much Capital Gains Tax Do You Pay? A capital gain occurs when you sell or are considered to have sold a capital property for more than its cost. This cost includes the adjusted cost base (ACB) and any outlays or expenses incurred to make the sale. Capital gains tax applies to these sales and if you make a loss on the sale, it can be used to offset any other capital gains. Update to Capital Gains Tax in 2024 The current capital gains tax rule on disposing capital property results in only 50% of the capital gain being included in taxable income. This is known as the inclusion rate, or how much is included in your taxable income. With the 2024 federal budget propsal, the inclusion rate is to go up to two-thirds (66.67%). While it affects all corporations and trusts, individuals are only affected for capital gains realized for the year on or after June 25, 2024 when exceeding $250,000. Keep in mind that your principal residence is excluded from this increase. With the $250,000 threshold, individuals incurring capital gains up to the amount only pay to the inclusion rate of 50%. This is the net of capital losses in the year or carried forward from previous years. Another point of consideration is for any employees exercising employee stock options. Any capital gains from stock options exercised over $250,000 face the inclusion rate of 66.67%. Any gains that amount under the threshold remain at the 50% rate. Capital losses are to remain at the 50% allowable rate. There is no change but any losses previously realized and carried forward can offset any gains that are to be at the new inclusion rate. In summary, for individuals with capital gains of over $250,000, net of losses, corporations, and trusts, there are two inclusion rates to consider. That is the 50% inclusion rate for gains up to the threshold and 66.67% for gains over the threshold. Calculating Capital Gain or Loss To calculate your capital gains or losses, prepare the following information. Subtract the total Adjusted Cost Base and any Outlays and Expenses from the Proceeds of the Disposition. The amount you get is your capital gain or loss and is needed on your tax return. Calculating Capital Gains or Losses in Foreign Currency Zero-Rated Capital Gains Tax Any capital gain that incurs as a result of a donation to a qualified donee may be eligible to an inclusion rate of zerio. This occurs if it is also one of the following properties: Capital Losses in Capital Gains Tax If the Adjusted Cost Base (ACB) and the Outlays & Expenses are higher than the Proceeds of the Disposition, this is a capital loss. Half of this capital loss can be used against any taxable gains in the tax year. Additionally, if your loss is higher than all taxable capital gains for the year, it becomes part of the calculation used for your net capital loss for the year. The net capital loss can be used to reduce your taxable capital gain in any of the 3 preceding years, or in any future year. If you would like to read more about how your capital gains are dealt with during your tax return, visit the CRA’s website and find information on Line 12700 – Taxable Capital Gains by clicking here.