February 25, 2018
Your 2017 Tax Cheat Sheet: Where You Should Really Be Hiding Your Money
Let’s get one thing straight: we are in no way suggesting that you actually cheat on your taxes. But if understanding how they work — and what you really owe — saves you a few bucks at the end of the day, that’s a good thing, right?
THE UNAVOIDABLE TRUTH
You must pay taxes. There’s no escaping them. You can ignore the deadlines, but much like a mafioso, the Canada Revenue Agency (CRA) isn’t about to let a debt slide. Inevitably they’ll come looking for your precious tax dollars, and believe us, if you thought paying taxes was bad, being audited is worse. Much, much worse.
All working Canadians pay personal income tax, the rate of which will range based on the tax bracket that a particular individual’s earnings fall under. Federal income tax brackets range from 15% to 33%. Tack on provincial tax rates and that range jumps up another 4% to 21%, depending on income and province of residence. The brackets work by taxing wage ranges, starting with 15% for the first $46,605 earned, followed by 20.5% on the next $46,603 earned (so, the portion of total pay above $46,605 but below $93,208), and so forth.
For a full breakdown on federal and provincial tax brackets: www.canada.ca.
On the global stage, our taxes rank on the higher end, cozying up alongside European countries like Germany, Portugal and Norway (though without the sexy European lifestyle). It’s easy to begrudge the taxman, but you’d be remiss to think about taxes without considering what those taxes pay for: healthcare, clean water, education, safe and clean(ish) streets, security in the form of police and emergency responders, social assistance . . . the list goes on, and they’re all points of pride for Canadians at home and abroad.
TAX TERMS YOU REALLY SHOULD UNDERSTAND
• T4 Slips: For salaried Canadians, a T4 slip is issued to you by your employer and indicates what you have been paid prior to deductions for the year (and is always damn depressing).
• T3 and T5 Slips: These are statements of investment income prepared by a bank or financial institution that covers the interest, dividends and foreign income you might have earned from mutual funds or other similar investments. (Yay!)
• Tax Credit: A specific amount of money that is deducted from the amount you owe — not the amount of income you’ve earned. So whether you owe CRA $1,000 or $10,000, the credit will always remain the same.
• Tax Deduction: Deductions reduce your total net income, thereby lowering the amount you will be taxed. For example, if you earned $75,000 in 2017 and put $5,000 into your RRSP, your total taxable income for 2017 will be $70,000.
• Audit: An investigation by the CRA of your filings (or lack thereof). Be prepared to share all reports and receipts you have used to file previous taxes. Audits can occur due to red flags on your filings, or as commonplace spot checks.
Registered Accounts: Recognized by the CRA, these can help you reduce your taxable earnings, effectively reducing what you need to pay for income taxes.
• RRSP: Think of your Registered Retirement Savings Plan as an income tax time machine. Every year you can put a fixed amount into your RRSP, and whatever amount you put in is removed from your taxable income that year, so you won’t pay taxes against it. (Hello, tax refund!) So what happens to that money? It’s placed into a magical account that’s frozen in time. You can buy mutual funds, stocks, ETFs and other investments products inside this account without worrying about taxes while you save for retirement. All magic must come to an end however, and you will need to pay tax on the whole shebang eventually. (Way to crush our tax-free shopping dreams.) Once you retire and begin to withdraw from this account, you will be taxed on what you pull out. The thought however, is that you will be making less income at that point in your life and will be taxed at a lower rate than in your younger, wealthier years.
• TFSA: Tax Free Savings Account are recognized by the CRA but have a few important differences compared to the RRSP. Instead of being a time machine and deferring your taxable income for the future, the money you put into your TFSA is not tax-free, but the money you make on that money is tax-free. This means that you will not reduce your taxable income each year and will not get a fat tax refund by contributing to a TFSA. (If that’s what you’re looking for, an RRSP is a better way to go.) The good news is that you can put anything you want in a TFSA, up to a certain amount. This can include mutual funds, stocks, ETFS, GICs, etc., and anything earned from your investments is yours to keep, tax-free. Unlike the RRSP, where you need to be careful about taking money out, the TFSA has no restrictions on withdrawals. You can take money out of it whenever you’d like. The one caveat: if you withdraw from this account, you won’t be able to replace that money until the following calendar year.
To learn more about savings and pension options, visit www.canada.ca.
Non Registered Accounts: A non-registered account includes pretty much any place you would store money. It takes your after-tax dollars and if you choose to put it in an investment, you will be required to pay income tax on much of the profit.
• Standard Bank Accounts: Basic chequing and savings accounts from any big bank.
• Non Registered Investment Accounts: These flexible accounts allow you to purchase investment products without contribution limits and no rules on taking money out.
• Offshore Bank Accounts: Fancy a trip to the Cayman? For better or worse it’s getting harder and harder to hide money overseas.
• Bitcoin (and other cyptocurrencies): A new form of decentralized currency that’s gaining in popularity. Bitcoin is incredibly volatile and therefore risky. Plus, the government is now treating any cryptocurrency withdrawals as non-registered income. (Though kudos to you if you can understand this enough to invest in it.)
• PayPal: The Federal Court of Canada has ordered PayPal to hand over details about its business account customers to Canadian tax authorities. This means that if you have been running a side hustle selling hand-knit kitten mittens and collecting tax-free money on Paypal, you might need to prepare for an audit.
TAX BREAKS TO BANK ON
• Gluten-free products (if you’re diagnosed as Celiac)
Don’t bank on: Expensing your transit pass
For a full list of tax breaks in Ontario, visit www.canada.ca.
SAVE THESE DATES IN YOUR CALENDAR
• February 26, 2018: NETFILE is open for business.
• March 1, 2018: This is the last day you can contribute to your RRSP for the 2017 tax year.
• April 30, 2018: This is the last day for personal income tax filing for the 2017 tax year.
Still confused? You should be. There’s a reason accountants train for years and retreat to bunkers every tax season. While their fees can admittedly sound hefty (ranging from a few hundred dollars to a few thousand), the money they can often save you through deductions and credits that more than covers their fee.