Demystifying Tax Brackets: March 4th, 2022

Hello All,

As we get closer to the tax deadline, I thought it would be a good idea to talk about some tax concepts, over the next few newsletters,and address some of the more frequent questions that I get. The most fundamental of these concepts, and one that is largely misunderstood, relates to how income is taxed in Canada.

Canada has a progressive tax system, which means that not every dollar of income earned is treated equally. Rather, taxation rates gradually increase as your income increases. This means that those who earn more not only pay a greater amount of tax in number of dollars, but they also pay a higher rate of tax as a percentage of income.  As an example someone who earns a $50,000 salary in Ontario will pay approximately $7,500 in income taxes (this does not include CPP and does include the basic personal exemption on which no tax is paid) while someone with $100,000 salary will pay $23,000, which is more than double the tax if we simply had a flat tax system.

To further break this down, it is helpful to understand tax brackets. A tax bracket is a basically a range and all income that falls within this range is taxed at the rate that applies to that tax bracket. In Ontario all earnings up to approximately $45k are taxed at about 20%. If you earn $50k, then only the additional $5k will be taxed at higher rate that applies to the next tax bracket which is about 29% (somewhat, as federal and Ontario tax brackets are different, but you get the point). Consequently your average tax rate will only be slightly higher than 20% since only the $5k is being taxed at the higher rate. To put it another way, you will never receive a lower net pay after tax as a result of an increase in earnings. One of the biggest misconceptions that people have is that if they accept a raise or work overtime, they will somehow earn less. While you will pay a higher percentage of tax on each dollar that you earn as your earnings increase, you will always receive more in after tax dollars for every dollar that is added to your wage or salary.

I wrote this post last year to define the difference between tax credits and tax deductions and to highlight the top 5 in each category. Each of these still applies for your 2021 taxes and helps you ensure that you are taking advantage where you can:

Small Business Articles/Tips

Grants for Digital Adoption in Canada The Canadian goverment announced the introduction of a new program of grants for Canadian small and medium businesses. They will be investing $4 billion over four years to support up to 160,000 small and medium businesses to grow their online presence and upgrade or adopt digital technologies. To find out more and to see if you are eligible visit their website.

Tax Tip: A good article on how to manage savings and maximize tax savings for excess funds in your corporation, and the consequences and considerations

QuickBooks Tip:

Use your profit and loss report to complete your unincorporated small business taxes (T2125)

For those of you who use QBO and do your own taxes (or even outsource to an accountant), the profit and loss report provides you with all the information you need to complete the T2125. You need to ensure that the profit and loss properly captures all of your business income and expenses and that the expenses are properly categorized so that they can be easily transcribed on to the T2125. To access the profit and loss, simply go to reports and you will find it under favourites. There are other customization options such as date range (make sure you select the calendar year 2021 when doing your taxes) and comparison to the previous year (for those with the essentials or plus versions of QBO). You can also see your profit and loss monthly and click on any of the amount fields to see the detail in each account category.

If you have specific questions about QBO, accounting or tax, don’t hesitate to send me an email at contact@montrealfinancial.ca and I will attempt to answer it in future newsletters.

Books and Resources

Small Business Tax Facts(Sole Proprietorships/Registered Businesses/Self Employed or anyone who has income that does not appear on a T4)

This book helps you have a better understanding of tax (brackets, tax rates, deductions etc), how it applies to your unincorporated small businesses and how to do your own tax return (or at least understand what your accountant does). It also includes a comprehensive breakdown of deductible expenses, by category with special sections on more complex deductions such as home office, vehicle and capital cost allowance.

FastStart Your Corporation(Corporations)
A step by step guide to starting your small business corporation, including what you need to know about incorporation, setting up your accounting and tax considerations.

QuickStart your QuickBooks(Sole Proprietorships and Corporations)
A comprehensive guide that takes you through the many features of QBO and gives you step by step instructions on how to setup and work with QBO day to day. It is ideal for beginners who have never used QBO before and also for those who are currently using it, but have questions or need guidance.

FastStart Your Business (Sole Proprietorships)
A step by step guide for anyone who is planning to start a Canadian business or become self employed (and does not want to incorporate) and wants to know what they need to do or simply has questions.

Small Business and Your Dividends (Corporations)
For incorporated small business owners who want to know more about small business dividends, the differences between salary vs dividends and which is better and step by step instructions on how to file your own dividend declarations (T5s).

Use discount code “special” to save 20% on any (or all) book(s) when you purchase from the website.

Please note that all books on my website are in PDF format.

If you prefer a print version, all books are also available at Amazon . Note that print versions purchased on Amazon include a complimentary PDF - you just need to email me and include proof of purchase.

Free Resources

New: Business 2022 Tax Deadline Calendar
Starting A Corporation Checklist
Start Your Business Checklist
Dividend Declarations Checklist
Small Business Tax Return Checklist
QBO Set Up Checklist.
Small Business Calculators
Previous newsletters.

Consultations

I also provide consultation services where I can answer your specific questions relating to your small business and/or finances, provide clarity and give you guidance. Additional details can be found here and here. Note that I no longer provide ongoing accounting or tax preparation services.

Reviews/Feedback

• I would love to hear your comments on my current blog posts, topic ideas for new blogs, book feedback or anything else that you want to talk to me about. You can use my feedback form or email me directly at ronika@montrealfinancial.ca.

• For anyone who has purchased my books through Amazon or directly and found them useful, I would be very grateful for a review on Amazon (to leave a review you only need to have an account with Amazon even if you did not purchase the book from there).

• Finally, if you think anyone would benefit from this newsletter, you can send them to my subscribe link.

Wishing everyone a speedy and painless tax season!

Ronika