I think we can all feel this little guy’s pain. We know we’re privileged to be earning money and living in a democracy where our tax contributions serve to make our society more hospitable, yet there’s no question that paying those taxes can really take some fun out of the game – whether it’s in Monopoly or real life.
The toughest tax bills are the ones you don’t expect— or are shockingly higher than you thought. Knowing what’s coming can help you plan both financially and psychologically. So, here’s a heads-up for on tax rates in Canada so you can plan ahead to save, spend, and invest in a more tax efficient way.
Federal income tax rates:
- 15% on the first $47,630 of taxable income, plus
- 20.5% on the next $47,629 of taxable income (any taxable income over 47,630 up to $95,259), plus
- 26% on the next $52,408 of taxable income (any taxable income over $95,259 up to $147,667), plus
- 29% on the next $62,704 of taxable income (any taxable income over 147,667 up to $210,371), plus
- 33% of taxable income over $210,371
Provincial income tax rates:
- Rates vary from 4% at the lowest rate in Nunavut to 21% at the highest rate in Nova Scotia. Full info here.
- 10% federal withholding tax on amounts up to $5,000; 20% on amounts between $5,001 and $15,000; 30% on amounts over $15,000. In Quebec, federal withholding taxes are half of these listed, yet provincial taxes are added on top.
- At age 71, if you cash out rather than transferring your RRSP to a RRIF or an annuity, the full amount will be added to your income in the year you make the withdrawal and will be fully taxable at the normal rates.
- You are allowed to withdraw a minimum percentage of your account based on your age. Each of these annual withdrawals is considered as income and fully taxable at your normal income tax rate.
- Any amount withdrawn above the annual minimum percentage is subject to a withholding tax similar to RRSP early withdrawals.
- Monthly payments from an annuity are added to your income and taxed at your normal income tax rate. If you buy the annuity with unregistered funds, the bulk of the payment may count as “return-of-capital” and will not be taxed; only the interest portion of the payout will be subject to tax. However, if you buy the annuity with registered funds from an RRSP, for example, the entire payout is taxable as income.
Investments in non-registered accounts:
- Fixed income investments such as bonds, GICs and Term Deposits: On an annual basis, 100% of any interest income must be added to your income tax return, whether you’ve cashed out the investment or are still holding it, thus getting taxed at your normal income tax rate.
- Capital gains tax: Only calculated when the investment is sold, and only 50% of the capital gains earned are added to your annual income tax return and taxed at your normal income tax rate.
- Dividends: In a complicated formula beloved only by accountants, dividends are ‘grossed up’ then reduced by a dividend tax credit. The net amount is added to your annual income tax return and taxed at your normal income tax rate. Although most Canadian dividends are eligible for this credit, not all of them are. Before investing, double-check this.
- Real estate income: Any rental income you collect must be added to your annual income tax return. Certain expenses act as deductions to reduce the amount and the net amount is subject to your normal income tax rate.
Spousal support (alimony):
- Where there is a court order or written agreement, regular recurring payments are fully taxable by the recipient ex-spouse and tax deductible by the providing ex-spouse.
- Child support payments are not taxable and, in-court orders that do not distinguish between child and spousal support, it’s all non-taxable.
Saving the best part for last (!)… tax-free sources of income in Canada:
- Investment income, capital gains and interest earned in a TFSA (Tax-free savings account). Unless, you hold U.S. stocks that pay dividends, in which case you will be taxed on them and receive no dividend tax credit either. E.G. Don’t do this, please. Keep U.S. dividend payers in your RRSP instead where they will be tax deferred until you begin collecting RRIF income.
- Government child benefits & child support payments
- Lottery winnings
- Inheritances and gifts (the estate is taxed, the beneficiary is not)
- Some scholarships and bursaries