Taxes are one of life’s biggest expenses and yet, there is little understanding of the fundamentals. As a Certified Financial Planner, part of my job is to educate my clients on the many different facets of finance. From my experience, tax knowledge is lacking and here I will attempt to educate and spur some interest in taxes. Taking some time to learn the fundamentals can save a significant amount of money over your life time and sets, the ground work for future tax planning.

We must first start with the fundamentals. Calculating your tax owing begins by adding up all of your difference sources of income. These varied sources include employment income, business income, grossed-up dividends, taxable capital gains, and interest income to name a few. Now that we have total income, we can begin to make deductions; this is my favourite part. An example of a common deduction is the amount you contributed to a Registered Retirement Savings Plan (RRSP). A deduction reduces taxable income which means if your income was $34, 000 and you made a $2000 RRSP contribution, your taxable income is now $32, 000. In this scenario based on the marginal tax bracket you are in, the value of this deduction is 20.05% ($401). Now you may ask, ‘what is this marginal tax bracket you refer too?’. Well, in Canada an individual’s tax bracket is a set range of income with a specified percentage of tax payable. To provide an example, the combined 2011 Federal and Provincial tax ranges goes like this:

Up to $37, 774 you will pay 20.05%. The next $3, 770 up to $41, 544 you will pay 24.15%. From $41, 544 to $66, 514 the tax man will charge 31.15%. From here there are a number of additional brackets until an individual reaches an income of $128, 000 at which point any income over this amount is taxed at 46.41%. What you should notice is that not all of your income is taxed at one set percentage; it is taxed in brackets with ever increasing percentage rates to each bracket. The common statement that ‘the government takes half of my money’ is actually incorrect, even though it may feel this way.

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