Are you staring at the screen trying to get your 2021 taxes done? This ultimate guide to taxable income in 2021 will help you get an idea of how your taxable income affects your tax payments.
Taxes are inevitable. Income taxes are a major source of our provincial and federal governments’ revenues and help fund our public system. While there are several types of taxes, income taxes are usually what we mean when we just say “taxes.”
How the Canadian Tax System Works
We have two levels of taxes in the Canadian income tax system. Canadian taxpayers pay both provincial and federal income tax. So, essentially, we all file two tax returns every year. Fortunately, the federal government combines the forms, and Cloud Tax combines the process, so you only have to go through the filing process once. But it does explain why we need a guide to taxable income.
Canadian federal tax rates are the same for all of us, but each province has different tax rates. For both your federal and provincial taxes, your employer and other sources deduct an estimated tax amount and remit it to the government in advance. So, when it is time to do your taxes, you have a positive balance in your tax account. The taxes you owe are deducted from that balance, and that decides whether you get a refund (if you owe less than your balance) or you owe more than you have already contributed. Your tax return lets you know if you owe additional taxes or are entitled to a tax refund.
One should pay any balance owing no later than April 30, 2021, in order to avoid paying interest and late filing penalties. Individuals can pay their balance owing using one of the following methods:
- Pay online by using your financial institution’s services
- Pay online by using the CRA’s My Payment service at ‘My payment’
- Pay by setting up a pre-authorized debit agreement using ‘My Account’
- Credit card, e-transfer, or PayPal through a third-party service provider
- Pay in person, with cash or by debit, at any Canada Post outlet across Canada for a fee. To do so you will need a remittance voucher with a QR code or a self-generated QR code.
- Pay in person at your financial institution in Canada. To do so, you have to use a remittance voucher, which you can ask for in My Account or by contacting the CRA
Province to Province
How much tax you pay is based on which province you live in (and how far north) and how much income you declare from all sources. The provincial rate is based on the province you live in on just one day, December 31 of that tax year. So, suppose you live in British Columbia but move to New Brunswick on December 1 (or July 1 or any other day!). In that case, you fall under the New Brunswick provincial tax rates for the whole year.
Canada uses a self-assessment income tax process, so residents file their own tax returns or hire someone to do so on their behalf. Each of us is responsible for getting our returns filed accurately and on time every year.
Changes to Canadian Taxes in 2021
There is no question that 2020 was an unusual year with profound effects on the economy and everything else. So, the Canada Revenue Agency (CRA) has made adaptations and changes to the tax system.
- If you received COVID-19 related benefits from the federal government, like the Canadian Economic Recovery Benefit (CERB), you need to include that information on your tax return.
- If you worked from home during the COVID-19 pandemic, you could claim a new, additional, special deduction for any expenses that are directly related to your work. These deductions include items like internet bills, electricity, office supplies, etc.
What is Taxable Income?
Income from all sources – allowable deductions = Taxable Income
The first important note in this guide to taxable income is that income taxes are not solely based on your wages. There are a number of other income sources that require you to pay tax. Let’s take a look at some income sources that could be taxable for you.
Wages or Salary
If you are like most Canadians, your salary or wages are your primary source of funds. So, your income will also account for most of your income tax payments. In Canada, we use a progressive taxation system, so as your income increases, the percentage of tax you pay also increases (up to a certain amount, of course). As a result, there are several income tax rates based on your taxable income.
Since your salary might not be your only source of income, let’s look at what you might need to add to your “Income from all Sources” before you can subtract your allowable deductions.
If you own property and make a profit on it through residential rent or commercial leases, you must disclose this income (less expenses) and pay a percentage as income tax. Your Cloud Tax calculations will take care of the details. Just make sure you have the information about both your income and expenses handy when you complete your Cloud Tax interview.
If you sold your house last year, you might be worried about owing income taxes on the capital gains. But if you owned and lived in your home as your principal residence for a total of at least 2 of the last 5 years before you sold it, it is exempt from capital gains. This ownership and use test means you don’t have to pay the approximately 24 % to 27 % capital gains tax for individual Canadians at the highest marginal tax rate, depending on which province.
You can also claim (large!) exemptions for capital gains towards your Lifetime Capital Gains Exemption (LCGE) if you sell a small business, a farm or fishing property. The LCGE could save you paying taxes on the profit you earn up to $892,218. This cumulative lifetime exemption means that you claim any amount at any time in your life when you sell qualifying property. You don’t have to claim the whole amount at one time.
If you are an entrepreneur running your own business, the profits you make are taxable. Self-employed workers and freelancers fall under this category, too.
You must include all kind of business income when you calculate it for tax purposes otherwise you may have to pay a penalty of 10% of the amount you failed to report after your first omission.
Other Income Sources
Any additional income sources count, too. Interest on savings. Dividends from investments. If money comes in, assume it is taxable until you know for sure it is not. Canadian tax rules are different for different types of investments. For example, interest income is 100% taxable, but capital gains are just 50% taxable. Plus, you might save even more on your taxes if you put any interest-earning savings into your Registered Retirement Savings Plan (RRSP) or Tax Free Savings Account (TFSA).
The Difference Between Gross Income & Taxable Income
Your gross income is all the money you receive from sources that aren’t specifically exempt from taxes. For example, if you receive a Canada Child Benefit (CCB), this is a tax-free benefit, so you don’t even add the amounts onto your tax forms.
Other non-taxable income amounts include:
- Amounts exempt under Section 87 of the Indian Act
- Almost all lottery winnings
- Most inheritances and gifts
- Amounts from Canada or allied countries for death or disability of war veterans
- GST/HST credits and CCB payments, including any from province or territory programs
- Family allowance (child support) payments
- The supplement for disabled children in Quebec
- Compensation from a province or territory as a victim of a criminal act
- A settlement from a motor vehicle accident
- Life insurance policy payouts after a death
- Most strike pay from a union, even when performing picketing duties are a requirement
- Amounts from your tax-free savings account (TFSA)
Even so, any income you earn from any of these amounts, like interest when you invest your lottery winnings, will be taxable.
Tax Deductions from Gross Income
Once you have calculated your total (gross) income from all sources, it is time to calculate your taxable income. Tax deductions reduce your taxable income, which lowers the amount of tax you pay.
When someone says you can “write that off,” they are talking about a tax deduction. But they don’t work like many people think they do. A tax deduction doesn’t reduce the amount of tax you owe directly. Tax deductions indirectly reduce the amount of tax you pay by reducing your gross (total) income to a lower amount, your taxable income. This can put you in a lower tax bracket or just reduce the amount you pay in the same bracket. Still, either way, minimizing your taxable income reduces the amount of taxes you owe.
Common tax deductions are:
- Childcare expenses
- Union and professional dues
- Pension Adjustments – You get a credit for your pension contributions whether you made them or your employer makes them for you. Your T-4 slip shows the Pension Adjustment amount in box 52.
- Registered Retirement Savings Plan (RRSP) contributions up to a maximum allowable limit every year. You get a contribution receipt from the financial institution where you made your investment.
- Eligible medical expenses
- Donations to political parties and charitable organizations
These deductions (and more! – Check your Cloud tax calculations) are subtracted from your gross income to determine your taxable income. Make sure you take all the deductions you are eligible for!
How does Taxable Income affect Tax Payments?
You don’t pay taxes on every penny that could potentially be taxable income. Your taxable income starts with gross income. Then you subtract deductions from your gross income to calculate the amount you’re actually taxed on (net income).
Once you (or Cloud Tax!) calculate your taxable income, it is time to determine how much tax you owe. You’ve probably heard of “tax brackets.” These are percentage ranges based on your taxable income.
Canadian Federal Tax Brackets for 2021
Each province has different ranges, but these are the 2021 federal tax rates on taxable income according to Canada Revenue Agency (CRA):
- 15 % on your first $ 49,020, plus
- 20.5 % on taxable income above $ 49,020 to $ 98,040, plus
- 26 % on taxable income above $ 98,040 to $ 151,978, plus
- 29 % on taxable income above $ 151,978 to $ 216,511 plus
- 33 % of taxable income above $ 216,511
So, let’s imagine you earned $ 75,000 from all sources, but you had enough deductions to reduce your taxable income to $ 60,000. Your tax would be calculated as:
15 % X $ 49,020 = $ 7,353.00
20.5 % X ($ 60,000 – $ 49,020) = $ 2,250.90
Total Tax Due = $ 9,603.90
You can see how your tax bracket is based on your taxable income, your gross income from all sources, less deductions. Once you calculate your taxable income, you apply the federal and provincial rates. With this calculation, you can see why it is so great to have Cloud Tax do the math, so you are sure to get it right! Your federal income tax is calculated first, then your provincial rate, and then the two are added together to get the total tax you owe.
Here are a few examples of provincial tax rates.
- 5.06 % on your first $ 42,184, plus
- 7.7 % on taxable income from $ 42,184 to $ 84,369
- 10.5 % on taxable income from $ 84,369 to $ 96,866
- 12.29 % on taxable income from $ 96,866 to $ 117,623
- 14.7 % on taxable income from $ 117,623 to $ 159,483
- 16.8 % on taxable income from $ 159,483 to $ 222,420
So, in our example of $60,000 in taxable income, if you live in BC you would pay:
5.06 % X $ 42,184 = $ 2,134.51
7.7 % X ($ 84,369 – $ 60,000) = $ 3,288.25
Total BC Provincial Tax Due = $ 5,422.76
Plus Federal Tax = $ 9,603.90
Total Tax Due = $15,026.66
So, with a taxable income of $ 60,000 and a total tax due of $ 15,026.66, you pay 25 % in taxes. This is called your “marginal tax rate.” From all the calculations, you can see why it is so important to have Cloud Tax take care of the details to make sure you get everything right. It is also easy to see why the Canadian government collects taxes ahead of time from employers. A tax refund or a small tax bill in April is not as bad as owing everything all at once!
The tax rates in each province and territory are a little different. Here are the current rates.
- 10% on your first $ 131,220
- 12% on taxable income from $ 131,221 to $ 157,464
- 13% on taxable income from $ 157,465 to $ 209,952
- 14% on taxable income from $ 209,953 to $ 314,928
- 15% on all taxable income over $ 314,928
So, if you lived in Alberta, you would just pay 10% on your first $ 60,000 in taxable income, or $ 6,000. Add that to your federal tax of $ 9,603.90 for a total of $ 15,603.90 and then you have a slightly higher marginal tax rate of 26 %.
- 10.5% on your first $45,677
- 12.5% on taxable income from $45,677 to $130,506
- 14.5% on taxable income over $130,506
If you lived in Saskatchewan, you still pay the same federal tax of $ 9,603.90, then add the provincial tax amount for your $ 60,000 taxable income.
10 % X $ 45,677 = $ 4,567.70
12.5 % X ($ 60,000 – $ 45,677) = $ 1,790.38
Provincial Tax Due = $ 6,358.08
Plus Federal Tax = $ 9,603.90
Total Tax Due = $ 15,961.98
So, in Saskatchewan, with a taxable income of $ 60,000, you pay $ 15,961.98 in income taxes, which is a marginal tax rate of 26.6 %.
Each province has its own rates, but the marginal tax rates are very similar across the country. Here are a few more provinces to compare.
- 10.8 % on your first $ 33,723
- 12.75 % on taxable income from $ 33,723 to $ 72,885
- 17.4 % on taxable income over $ 72,885
- 5.05 % on your first $ 45,142
- 9.15 % on taxable income from $ 45,142 to $ 90,287
- 11.16 % on taxable income $ 90,287 to $ 150,000
- 12.16 % on taxable income from $ 150,001 to $ 220,000
- 13.16 % on amounts over $ 220,000
Newfoundland and Labrador
- 8.7 % on your first $ 38,081
- 14.5 % on taxable income from $ 38,081 to $ 76,161
- 15.8 % on taxable income from $ 76,161 to $1 35,973
- 17.3 % on taxable income from $ 135,973 to $ 190,363
- 18.3 % on amounts over $ 190,363
- 4 % on your first $ 46,740
- 7 % on taxable income from $ 46,740 to $ 93,480
- 9 % on taxable income from $ 93,480 to $ 151,978
- 11.5 % on amounts over $151,978
- 6.4 % on your first $49,020
- 9 % on taxable income from $ 49,020 to $ 98,040
- 10.9 % on taxable income from $ 98,040 to $ 151,978
- 12.8 % on taxable income from $151,978 to $500,000
- 15% on amounts over $500,000
So, you can see how your taxable income affects your tax payments for both your federal income tax and provincial taxes. That’s why the goal is to minimize your taxable income so you pay less tax. It doesn’t really matter what your gross income is, as it doesn’t impact the amount of taxes you pay, federally or provincially. It is only your taxable income that affects your tax bill.
Get the Most Out of Your Tax Return with Cloud Tax
We all pay income tax in Canada based on our taxable income and where we live in the country. Hopefully, this ultimate guide to taxable income in 2021 will enable you to successfully maneuver the income tax system. As you add up all your income from every source, you must report that income (unless it is not taxable) on your tax return every year. Then, you can make the deductions you are eligible for to minimize the tax you pay while still fulfilling your obligations as a Canadian taxpayer.
With literally thousands of tax laws, Cloud Tax makes sure your taxes are calculated accurately, so you pay only the tax you owe. Don’t pay one penny extra! Cloud Tax is here to help you get the most out of your tax return in 2021!