As a Canadian taxpayer, you might have heard the term taxable income. But what exactly does it mean and how does it affect your taxes? In this article, we will explain everything you need to know about taxable income.
What is Taxable Income?
Taxable income is the portion of your income that is subject to taxation by the government. This includes employment income, self-employment income, investment income, and any other sources of income that are not exempt from taxation.
How is Taxable Income Calculated?
To calculate your taxable income, you first need to determine your total income. This includes all the money you earned during the tax year, including employment income, self-employment income, investment income, and any other sources of income.
Once you have determined your total income, you can subtract any deductions and credits to arrive at your taxable income. Deductions are expenses that can be subtracted from your total income to reduce your taxable income. Common deductions include RRSP contributions, child care expenses, and employment expenses. Credits are amounts that can be subtracted from the tax you owe.
Taxable income is then used to calculate your federal and provincial income tax liability. The higher your taxable income, the more taxes you will owe.
Taxable Income and Tax Brackets
Taxable income is important because it determines which tax bracket you fall into. The Canadian tax system has a progressive tax rate, which means that as your taxable income increases, so does the tax rate you pay.
In Ontario, for example, the tax rates for the 2022 tax year are as follows:
- 5.05% on the first $45,142 of taxable income
- 9.15% on the next $45,145
- 11.16% on the next $60,447
- 12.16% on the next $70,000
- 13.16% on the amount over $220,734
If your taxable income is $50,000, you would pay 5.05% on the first $45,142 and 9.15% on the remaining $4,858.
Taxable Income and Tax Planning
Understanding your taxable income is important for tax planning. By reducing your taxable income through deductions and credits, you can reduce the amount of taxes you owe.
One strategy for reducing your taxable income is to make RRSP contributions. Contributions to an RRSP are deductible from your taxable income, which can result in significant tax savings. Other strategies include making charitable donations, claiming eligible medical expenses, and taking advantage of tax credits for education or home renovations.
Conclusion
Taxable income is an important concept to understand for Canadian taxpayers. By knowing how taxable income is calculated and how it affects your taxes, you can make informed decisions about your finances and take advantage of strategies to reduce your tax liability. Remember, every dollar you can save on taxes is a dollar that can be put towards your financial goals.