Disclaimer: The information provided in this post uses accounting standards for private enterprises and Canada Revenue Agency tax legislation. This post is meant for educational and informational purposes only and does not constitute tax or accounting advice.
I thought it would be wise to discuss how taxes work in Canada (sorry to my American friends, but I’m not qualified, nor do I have the requisite knowledge to provide advice on the American taxation system) before we discuss certain nuances like things you can claim and GST/HST/PST.
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What are taxes?
Simply put, taxes are a levy by the government on your earnings. Whether you are employed, self employed, or a corporation, all three are required to pay taxes.
How are taxes calculated?
Each year, Canadian residents are required to submit a personal tax return to both the federal and provincial governments.
The amount you pay in tax depends on the following:
- Income earned
- Tax credits
Income earned includes, but is not limited to, the following items:
- Employment income
- Self employment income (ie. income earned by way of a blog if you are not incorporated)
- RRSP income
- Freelance or contract income
- Certain employment benefits
- Rental income
Tax deductions are qualifying amounts that reduce the amount of income on your tax return to decrease your net income. Net income is the amount of income used to determine the amount of taxes you pay.
Deductions include, but are not limited to, the following items:
- RRSP Contributions
- Self employment income expenses
- Union dues
- Childcare expenses
- Moving expenses
Tax credits are amounts that reduce the amount of taxes payable. They are applied against the taxes calculated after deductions (don’t worry, there’s an example coming). You multiply the total value of the credit by 15% to determine the amount of tax reduction.
Tax credits include, but are not limited to, the following items:
- Monthly bus pass
- Children’s fitness tax credit
Canada uses what is known as a marginal tax system. This means that not everyone pays the same amount of taxes.
I’ve listed the relevant tax rates below, but if they bore you (they probably will) keep on scrolling for a few examples.
Federal tax rates
Those are used to determine how much income tax you have to pay the CRA on your taxable income.
- 15% on the first $45,282 of taxable income
- 20.5% on the next $45,281 of taxable income (over $45,282 up to $90,563), +
- 26% on the next $49,825 of taxable income (over $90,563 up to $140,388)
- 29% on the next $59,612 of taxable income (over $140,388 up to $200,000), +
- 33% of taxable income over $200,000.
Individuals also need to pay provincial taxes and the amounts are noted below:
- 10% on the first $125,000 of taxable income, +
- 12% on the next $25,000 (over $125,000 up to $150,000), +
- 13% on the next $50,000 (over $150,000 up to $200,000), +
- 14% on the next $100,000 ( over$200,000 up to $300,000), +
- 15% of taxable income over $300,000.
- 5.06% on the first $38,210 of taxable income, +
- 7.7% on the next $38,211, +
- 10.5% on the next $11,320, +
- 12.29% on the next $18,802, +
- 14.7% on the next $106,543
- 10.8% on the first $31,000 of taxable income, +
- 12.75% on the next $36,000, +
- 17.4% on the amount over $67,000
Newfoundland and Labrador
- 8.2% on the first $35,148 of taxable income, +
- 13.5% on the next $35,147, +
- 14.55% on the next $55,205, +
- 15.8% on the next $50,200, +
- 16.8% for amounts over $175,700.
- 5.9% on the first $41,011 of taxable income, +
- 8.6% on the next $41,013, +
- 12.2% on the next $51,329, +
- 14.05% on the amount over $133,353.
- 8.79% on the first $29,590 of taxable income, +
- 14.95% on the next $29,590, +
- 16.67% on the next $33,820, +
- 17.5% on the next $57,000, +
- 21% on the amount over $150,000
- 4% on the first $43,176 of taxable income, +
- 7% on the next $43,175, +
- 9% on the next $54,037, +
- 11.5% on the amount over $140,388.
- 5.05% on the first $41,536 of taxable income, +
- 9.15% on the next $41,539, +
- 11.16% on the next $66,925, +
- 12.16% on the next $70,000, +
- 13.16% on the amount over $220,000
Prince Edward Island
- 9.8% on the first $31,984 of taxable income, +
- 13.8% on the next $31,985, +
- 16.7% on the amount over $63,969
- 16% on the first $42,390 of taxable income, +
- 20% on the next $42,390, +
- 24% on the next $18,370, +
- 25.75% on the amount over $103,150.
- 11% on the first $44,601 of taxable income, +
- 13% on the next $82,829, +
- 15% on the amount over $127,430.
- 6.4% on the first $45,282 of taxable income, +
- 9% on the next $45,281, +
- 10.9% on the next $49,825, +
- 12.8% on the next $359,612, +
- 15% on the amount over $500,000.
Sample tax calculation
I’m sure you’re looking at all the numbers above and 1 – are rolling your eyes and 2 – are wondering how and why this matters.
Now, because I’m a nerdy accountant and love examples, this is just what we’re going to!
We’re going to take blogger Suzy. Suzy lives in Alberta works full time and earns $70,000/year at her job. She also contributes 5% of her income to an RRSP. In addition to her employment income, she earned $3,000 from her blog in 2016 and has self employment (blogging) expenses of $3,200. She also pays $80/month for a bus pass.
For the purposes of this example, I’ve ignored items such as CPP and EI contributions; however, you can’t do that on your taxes. I merely wanted to illustrate in an easy to follow manner, how taxes would be calculated.
I’ve had a number of bloggers ask why they should claim income and expenses and set their business up as a blog.
To help illustrate how being able to claim expenses can help on your taxes, I’ve repeated the above example, but have eliminated the RRSP contributions, so we can compare the two scenarios.
By keeping track of expenses and claiming them as appropriate, Suzy is able to receive a refund of $205 versus paying $771 in taxes.
You might be wondering why I didn’t create a scenario where Suzy doesn’t claim any income from her blog, but remember, in Canada, you must (yes, must) claim any and all income earned. So any kind of advertising revenue, or compensation, even in a one-off scenario must be claimed on your taxes.
You also need to claim items received by way of an ambassadorship, or product received; however, I’ll go into that topic in more detail at a later date.