“More money, more problems,” says certified financial planner Jackie Porter.
What she is referring to is that the more income you have, the more the Canada Revenue Agency (CRA) taxes you.
But it’s not as simple as fitting into one tax rate. In Canada, we operate under a marginal tax rate system, where you are taxed in bands of income, or tax brackets (after you subtract eligible deductions, such as child-care expenses).
So, for the 2019 tax year, you are taxed:
- 15% on the first $47,630 of taxable income, plus
- 20.5% on the next $47,629 of taxable income (on the portion of taxable income over $47,630 up to $95,259), plus
- 26% on the next $52,408 of taxable income (on the portion of taxable income over $95,259 up to $147,667), plus
- 29% on the next $63,895 of taxable income (on the portion of taxable income over $150,473 up to $214,368), plus
- 33% of taxable income over $214,368
But it gets more complicated. Each province and territory also has a different set of marginal rates and their rates and tax brackets vary. In Ontario, you are taxed under a marginal tax rate system as well, but you file one combined tax return.
It gets even more complicated because different types of income are taxed differently. For instance, eligible dividends and capital gains are taxed lower than employment income.
Being strategic about tax sheltering is a way for people to pay less in taxes by reducing their income, say, by sheltering some money in a Registered Retirement Savings Plan. That amount is not counted toward your taxable income, potentially putting you in a lower tax bracket. When you take that amount out after retirement, you should be getting less income overall, so this amount should be taxed at a lower level than while you were working.
There are several online calculators that allow you to estimate the amount of taxes you will pay. And be aware that the numbers will change for the 2020 tax year.
“You can do something about how much you pay in taxes if you have a plan,” says Porter.
So, it’s probably time you start having making that plan.