No one is exempt from paying taxes in Canada. And the tax bracket that you’re in can make all the difference in the amount you dish out each year to the government. If you don’t have your facts straight, not only can it cost you money if you submit an incorrect claim, but ignorance can also starve you of your wealth. To see if you’re up to par on your tax knowledge, here are 6 common myths about the Canadian Tax Bracket that most people commonly misunderstand.
If I’m In The Second Tax Bracket I Pay 20.5% On My Income
In Canada, the way taxes are calculated is quite complicated. If you make less than $46,605, you’re taxed at the low rate of 15%. But those in the second tax bracket will be taxed at 15% up until $46,605 and then at 20.5% for the remaining amount up to $93,208.
This incremental approach also applies to the remaining tax brackets. So, for instance if you make over $202,800 you would pay:
· 15% for the first $46,605
· 20.5% between $46,605 up to $93,208,
· 26% for income between $93,208 and $143,489
· 29% for income between $143,489 and $205,842
· 33% for income over $205,842.
If I Pay Federal Tax I Don’t Have To Pay Provincial Tax
Every Canadian is expected to claim tax for both. In all provinces and territories, except Quebec, the Provincial and Territorial Tax rates for 2018 are calculated in the same way as the Federal Tax Rate. The only difference is that the exact tax rates used will vary by province. You can find the current rates here.
I Can Transfer Termination Pay To My RRSP For Free
Unfortunately, if you lose your job and are issued termination pay, this amount will also count towards your income. Only if you’ve been employed by your company since before 1996, can you be able to transfer any of the termination pay to your RRSP at a tax-free rate.
My Bonus And Rewards Are Not Taxable
The above are considered employee benefits that are indeed taxable and need to be added to your income. When an employee provides something personal in nature or pays, that benefit has to be taxed. This includes, any personal bonuses, trips, prizes, and awards. Luckily, most taxable benefits will be included in your statement of employment, but if you’re not sure what exactly qualifies, make sure to talk to a professional who does.
The Employee Stock Options I Purchased Are Tax-Free
This is another common myth. If you purchased company shares at a price less than fair market value, the difference should be included in your income. And if this pushes you into a new tax bracket, you will be required to pay taxes at the new rate as well.
All Investment Incomes Are Taxed The Same Way
Having a tax strategy is crucial because not all investment incomes are equal and all are taxed differently. It is recommended to allocate assets which generate income and are heavily taxed into tax-sheltered investments. Having a professional on your side to help you create a plan that will reduce your taxable investment income, can help put more money in your pocket and keep your tax bracket at an affordable level.
Understanding exactly what contributes to your income and what you can do to reduce your taxes can lower your tax bracket can greatly improve your wealth.