Tax 101 - How Canadian Taxes Work

Every year I have people contacting me with their tax questions and often they say "This is probably silly but.." or "I'm probably stupid but..." and I HATE IT!

I hate it because it's not stupid and it's not silly! These are valid questions and how would you know? Seriously, how would you know!? We don't get taught this in school and unless someone tells you how are you supposed to know?

So much information out there is shrouded in mystery or made out to be so complicated (it's really not, I promise) and there is also so much misinformation out there. It can be hard to even know where to look because if you don't know what you're missing how are you supposed to know what to ask or where to find it?

That's why today I am breaking down how a Canadian tax return works in very simple, easy to understand terms. Imagine we're 2 friends chatting over coffee. There, of course, is some nuance to this but these are the basic steps.

Step 1 - Income

First, we need to figure out our income. You'll want to look at all of your income from each source and add it together into one number. This is called your total income.

Then subtract any deduction you have (my free full list of credits & deductions can be found HERE). That will get you your taxable income. We use this to find your federal and provincial tax rate.

Step 2 - Find your Federal & Provincial Tax

Based on your taxable income find your federal and provincial tax payable. You can find your federal tax rate on your T1 General and your provincial tax rate on your provincial 428 form.

Multiply your taxable income by your federal tax rate and your provincial tax rate to see how much federal tax you need to pay and how much provincial tax you need to pay.

Step 3 - Calculate your Tax Credits

Then add together all of your federal tax credits for the year. Common ones include Basic Personal Amount, Canada Employment Amount, CPP paid, EI paid, tuition, donations etc. (check the list to make sure you have all the credits that apply to you). Once you have that total multiply it by 15% then subtract that from how much federal tax you have to pay (calculated in step 2).

For the provincial side add together all of your provincial tax credits for the year. Common ones include Basic Personal Amount, CPP paid, EI paid, tuition, donations etc. Once you have that total multiply it by the lowest tax bracket percentage in your province and subtract that from how much provincial tax you have to pay (calculated in step 2).

Step 4 - Finding your Total Tax Payable

Add the remaining amount of federal tax and the remaining amount of provincial tax together to find your total tax payable for that year.

Step 5 - Calculate your Refund or Balance Owing

Lastly, subtract how much tax you have already paid during the year from your total tax payable to find out if you have overpaid and have a refund or underpaid and have a balance owing.

That's it! It's really that simple!

Want my help?

I am currently accepting new clients. I'd be happy to hop on a complimentary, no-obligation Zoom call with you to discuss your tax situation in more detail, answer your questions, and get you a quote for my services. To book go to the booking calendar and select Personal Tax Filing.