If you have ever wondered how taxes work or complained that we weren't taught about taxes in school this blog post is for you.
This is my crash course on Tax 101.
1. We first start with adding all of your sources of income together. This number is your total income.
This includes T4 income, self employment income, rental income, EI, RRSP withdrawals, interest, capital gains, dividends etc.
2. Then subtract any deduction you have from your total income. Common deductions include RRSP & FHSA contributions, childcare, union dues, professional fees, professional liability insurance, home office expenses & other employment expenses, Northern Residents Deduction, etc.
You can find my FREE full list of every credit & deduction you can claim HERE.
Once you subtract your deductions from your total income that will give you your taxable income.
We use our taxable income to find our federal and provincial tax rate.
3. Multiply your taxable income by your federal tax rate and your provincial tax rate to see how much federal tax you need to pay and how much provincial tax you need to pay.
4. Next add together all of your federal tax credits for the year.
Common credits include Basic Personal Amount, Canada Employment Amount, CPP paid, EI paid, tuition, donations, Disability Tax Credit, Eligible Dependant credit, etc.
Click HERE for the list to make sure you have all the credits that apply to you and you're not overpaying for your taxes.
5. Once you have that total multiply it by 15% then subtract that from how much federal tax you have to pay which you calculated in step 3.
6. For the provincial side add together all of your provincial tax credits for the year.
These are typically similar to the federal credits however there can be some variation between provinces. For example in Manitoba, Nova Scotia, Newfoundland & Labrador, Quebec, and Yukon you are able to claim your children's fitness credits but not in the other provinces & territories.
7. Once you have that total multiply it by the lowest tax bracket percentage in your province and subtract that from how much provincial tax you have to pay which was calculated in step 3.
8. Add the remaining amount of federal tax and the remaining amount of provincial tax together to find your total tax payable that year.
9. Subtract how much tax you have already paid during the year from your total payable to find out if you have overpaid your tax during the year and have a refund, or underpaid and have a balance owing.
NOTE: There are some nuances to claiming certain credits and deductions and some variations of what you can claim on the provincial tax portion across different provinces but these are the basic steps and calculations.
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