Canadian Income Tax

There are a lot of things to know when it comes to taxes. So it’s easy to get overwhelmed.

But don’t be!! On the surface, taxes seem weird and boring.. but I promise, knowing the basics about how they work can be really useful!

Also. Taxes are kind of fun… not like “sit-down-in-front-of-the-fire-with-a-drink-and-a-copy-of-the-tax-code” fun, but like “I-find-that-interesting-and-see-how-it-applies-to-my-life” kind of fun…

Okay. So just because I think they’re fun doesn’t mean you will, but we’re all going to be paying taxes for the rest of our lives. And for the artist/freelancer types, understanding how taxes work is really important to your business.

Most importantly, knowing how much tax the government wants from you, and ways that you can lower that amount… will save you sweet sweet dollars.

And honestly, it’s pretty easy…. Not the crazy parts (that’s why you find an accountant who just loves the stuff… like my accountant (who is awesome))…. But the basics.

Seriously. When I say it’s easy, I am speaking to the lowest bar possible. Me. I knew nothing. I mean … nothing. It’s amazing to me how much education I managed to pick up and still completely avoid any real knowledge about taxes. I honestly don’t know if that was because no one ever talked about it, or whether it was due to my amazing skills of avoidance and denial.

But now I know a little more, and it really helps.

Mainly I think it’s cool to know how it all works. You want to be cool… don’t you?

Of course you do.

So take a deep breath, and get just a little bit excited.

I promise… it’s going to be fun!

What are taxes for?

We all pay tax all the time. You pay it on most of the things you buy. It’s annoying, not only because things are more expensive, but it keeps me from ever knowing exactly what things cost (No… I don’t have the ability to calculate 13% on a price… my brain is full of half baked jingle ideas that will never see the light of day… it’s a nightmare…).

But the tax you hear people talk about this time of year is income tax. For us self-employed folks it’s due on June 15th. But it’s important to note that even though you can file that late… IF you owe tax, you have to pay it by April 30th or they start running the interest. So it’s best to get it out of the way early.

Income tax is the government’s big payday, and it pays for all sorts of stuff that we take for granted.

What tax is forThat’s right! Among the many tax-funded options: our national parks (for those of you that don’t know, all of Canada is basically a national park), the roads that connect this great land, both potholed and unpotholed, and our healthcare system (to all the Americans reading… sorry… your taxes don’t do this… but our military doesn’t have any aircraft carriers… so…)

It also goes to paying our fine civil servants, whether we like them or not.

Who tax is for

That (in case you can’t tell) is our current prime minister… I think it’s an incredible likeness…

The puppy doesn’t work for the government yet … but see how cute he is? Don’t you want to find out how he can be yours? Keep reading!

So, taxes. They get spent on good stuff (mostly). And for better or worse they make this country what it is.

Income tax is exactly what it sounds like. Every dollar that you earn, the government wants (and gets) a piece of.

How big of a piece?

Well, that depends.

How Much do you have to pay?

Here in Canada we work on a MARGINAL SYSTEM (for fancy people it’s called a ‘progressive tax system’), which basically means they sort the dollars that you make into categories. The lower amounts get a lower percentage of tax taken off, and the higher amounts get a larger amount. So if you make less money then you pay less tax, and if you make lots of money, you pay more tax. Doesn’t that sound nice and fair? (And for all of you out there who know it’s not… maybe just leave it… let the tax newbies believe in Tax-Santa-Claus just a while longer.)

Figuring out what tax bracket you fall into is actually kind of cool, and pretty misunderstood.

Marginal Tax Rate BracketsCheck out this handy (and colourful) graph. There are two main take-aways when looking at the tax brackets.

Firstly, the government gets a ton of your money. dHow much are we even paying that puppy???

Secondly, you see how as you gain more income the tax rate for each dollar grows.

Now there’s a crazy story going around that it’s bad to earn more money because you’ll end up in a higher tax bracket. That is insane, and completely incorrect. It’s only bad to earn money if in some way, even indirectly, that puppy is getting hurt. Don’t hurt the puppy.

CRA distributes

Fun Fact: You’ll notice that the marginal bracket chart shows ‘combined taxes’. That means that those are both your federal, and provincial taxes combined. In Canada (except Quebec) you simply pay your income tax to the CANADA REVENUE AGENCY and then they send the province their piece of the pie.

When you are being taxed, your ORANGE dollars (11,139 − 43,953) are all taxed at 18.68% (are the super specific numbers weird to anyone else?… I think they just do it so it looks more complicated.)

But what happens when you head into another margin? Well, if you’re making 50,000 dollars a year (good for you!) it looks like you’re firmly in the BLUE zone. You must have to pay 30.02% on ALL your income. Nope….ONLY the dollars that fall in the blue zone end up being taxed at the new blue rate. The rest are still in the orange category… and are taxed at the 18.68(29083784937298562394823)% rate.


So go forth and make more money my friends. It will not hurt your tax situation.

Doesn’t quite make sense yet? No worries… check out THE STORY OF MARGINAL TAX RATES for a few more charts and examples.

 So that’s how you (or the government) figures out how much you need to pay.


Story of Canadian Income Tax - Non Taxable How do they know how much you made?

Well, here in Canada we’re a simple folk. A trusting folk. So the government has decided to just let us report to them how much we made. Honour system.

Of course, if there were someone you knew, probably not Canadian at all, who wanted to …. Lie…. about their income.. that could be quite lucrative.

Until he or she got caught and went to jail (or just got fined… jail had a better ring to it… but you’d probably just get fined).

Yes, Canada uses a self-reporting tax system, but there are plenty of things in place to make sure that everyone stays honest, hockey-loving Canadians.

First and foremost the Almighty Audit. Sometimes random, and sometimes chosen deliberately (if your account gets flagged for shady activity)… the lovely people from the CRA will come and check out your finances personally.

I hear it’s quite a pleasant experience.

I live in constant fear of the audit and think it’s a healthy fear to have. But you can tame that fear by doing a few simple things.

  1. DON’T LIE: Report all the income that comes in.
  2. KEEP GOOD RECORDS: If the taxman (or woman) comes by you want to be able to easily show that you didn’t *see number 1*
  3. IF IN DOUBT… FIGURE IT OUT: Know that as a creative freelancer… you’re probably living in a murky tax area. The tax code isn’t super specific about our jobs, so talk to TAX PROFESSIONALS about what is possible and make sure you educate yourself.

Murky? How did we end up in a murky tax area?

Well, before I talk about the murk, I should discuss another big part of taxes.

Tax Deductions.

This is the part that you might have heard about… people deducting this, and writing off that.

Deductions are a way for you to decrease that ‘income’ amount that the government is taxing, which means you PAY LESS!

Tax Deduction Image

There are some deductions that are available to everyone: union dues, child care expenses, and contributions to an RRSP are a few examples.

But when you own your own business (and yes dear freelancer, you own your own business) you can also deduct any business expense from your income.

If you’re a little bit confused feel free to check out two articles that might help:

Unsuspecting business ownersTax Deductions Image

Deducting your business expenses can save you a TON of money, and it is absolutely essential process to figure out.  Luckily, the how is pretty simple.

Deducting expenses allows your total taxable income to lower. It might even take you out of a HIGHER TAX BRACKET. But no matter what, the less income the government can tax, the less tax you’ll have to pay.

The Murk Zone

Tax Credits

The other way to decrease the amount of tax you pay is through tax credits. Unlike deductions tax credits don’t get applied to your income. They get applied straight to the tax that you owe. Which kind of makes them amazing.

Tax Credit Image

There’s actually a basic personal tax credit that we all have access to. It accounts for your first 11 thousand dollars of income… making it TAX FREE. That’s why the margins up above don’t have a percentage for the first bit of income. Thanks, government! You’re the swellest.

But you can also get TAX CREDITS for going to school (education credit), medical expenses (basic medical credit), and giving money to charity.

Tax credits… making good things… better.

If you don’t quite get the tax credit thing yet, right this way for A BIT MORE INFO.

So…. what do I do now…?

So those are the basics of how taxes work. So now what are you supposed to do about it? How are you gonna afford that puppy I promised you.

It’s pretty simple. Just follow these three steps and you’ll be FINE.

1. What’s comin in? TRACK YOUR INCOME

Make sure you’re keeping track of how much money you’re making, yes.. Even the cash (the CRA makes a big deal about servers and their tips, they want to know about ALL THE CASH). If you forget to claim something, it could bite you later.

A lot of times places that hire you will issue something called a T4(A). They send them out early in the new year for the previous year. So I’ll be receiving the 2014 ones now, in early 2015. On that T4(A) it will say: how much they paid you, how much they deducted off the cheque (sometimes they deduct tax, sometimes they don’t… you have to check).

Sample T4A copy

Other smaller jobs may not issue T4’s. It’s up to you to claim that income on your own. You can usually catch it by going through your bank statements at the end of the year, but it’s easier if you find some place to write things down as they come in. If you’re budgeting, it’s all right there in your budget. Man. Doesn’t budgeting just make everything better!?

2. Don’t spend the government’s money. PUT ASIDE THE TAX YOU OWE!

It's not your moneyAll that income you just tracked… you owe tax on it. That means that you can’t spend that money on ponies and shoes. Put it aside before you get the chance to spend it.

As soon as you get a cheque, take the percentage that belong to the government, and put it in some savings account far away from the money you spend.

If you want to know how I do it, check out: IT’S NOT YOUR MONEY!

3. What’s goin out? TRACK YOUR EXPENSES

Get a receipt. I’ve already written it in a ton of posts, but every time I tell people to get receipts a CRA agent gets his wings. So… I’m going to keep on spreading the word.

If you don’t have a RECEIPT for a business expense you can’t claim it. You just can’t. Well, I guess you can…. Self-reporting and all that…. But it can end up biting you in the butt.

Yes… maybe you don’t get audited, and you scrape by. But if you do get caught claiming deductions that you don’t have documentation to back up (by which I mean receipts) it could give the audit man a reason to question every single deduction you’ve made…

Never forget that you’re living in the murk zone.

Another great tool for keeping track of your business expenses is KEEPING SEPARATE BUSINESS AND PERSONAL ACCOUNTS and budgets. That way, come tax time you can check through  your accounts and know all of the things that you bought for your business.

And then you will look for the corresponding RECEIPT 🙂

Buying your puppy

If you’ve made it this far, you definitely deserve a puppy. The sweetest puppy there is. But how does this information help you get there?

Well, just by keeping track of my income, putting aside the taxes I owe, and deducting all my business expenses last year I saved myself over $4000 in taxes!

And if you check out this very helpful dog-owning-expense-sheet (and kind of crazy if it’s true… help me out dog owners):

Pet care

There it is! Right there in black and white.

So maybe you can take those savings and put them towards a down payment, or retirement.. OR you can finally get that puppy that you deserve.  Happy spending!