Tool : Taxes

A simple tool to understand taxes. 

To access the file, clic above for a link to an Excel file without macro. The goal of the tool is get a general understanding of taxes. It is not to do your taxes. I am not a tax professional. I use a tax software to do my taxes.

See at the end for other information to navigate the file.  

Analysis :

Taxes are complex and intimidating. I asked AI to review my niece article including taxes and he removed all taxes reference. He doubted that a 18 years old should be aware of taxes. He suggested that keeping it a secret was a great idea. That is rather a silly idea. Taxes will likely 20%-50% of your income. Not caring is dumb.  Caring will save you thousands of dollars! 

Not all provinces taxes the same, but they have a similar framework. 

• You build up a "Taxable income" based on earnings, pension, some withdrawal type, non-registered income and others. Some item are tax deductible and get to reduce your taxable income.
• Your taxable income get a tax up to the bracket end at a particular tax rate then and your taxable income  between the next bracket and so on.
• You get then tax credit using the lowest tax rate on these. 

Conclusion: 

• Not all taxable income are treated the same. Income, pension income, obligation returns, non-Canadian dividend get 100% taxable. However, only 50% of capital gains are treated as taxable (over 250k, at 67%). Canadian dividend get tax at 138% or 115%, but have a substantial tax credit. At the end of the day, it is tax at slightly less than 100%. 

• Not all province get taxes the same. Depending on the tax bracket,  AB, BC, ON are lowest tax and NL, NS or QC are the highest. The exhaustive table can be found in annexe at the end but provided an extract below. 

• Regardless of the province, the taxes are progressive. That is at $30,000, you get 9-12% tax, but at $200,000, you get tax at 29-36%. At the $500,000, it is about 50% in taxes. However, usually at that revenue they often get other rewards to reduce the tax burden. 
• Tax credit and tax deduction are important. Using RRSP contribution provide tax deduction at your highest bracket! 
• A little known advantage to use your employer RRSP is that it actually reduces your CPP/QPP contributions as well. Your other RRSP contributions will not reduce your CPP/QPP contributions. 
• It feels great that you contribute less to QPP/CPP above the YMPE and 0$ above YAMPE. However, you don't get any replacement income neither above these. You get about 25%-33% of the final average 5 years of YMPE/YAMPE at your retirement. That means, income above YMPE/YAMPE will not get that 25%-33% replacement and must be self-funded. You should thus contribute about 8% extra on income above YAMPE to compensate (ie: 15% below YAMPE; 23% above). See the wonderful PDF from Retraite Quebec which explains in detail their program.  
• Pension, Old Age Security and QPP/CPP are taxable income. You can ask to withheld taxes on them so you don't get a surprise at the start of your retirement. 
• At 65 you get a great credit of 1k-2k , if you are below 40k and lower up to 80k, specific by province. In addition you get also a tax credit on pension of a few hundred bucks.  Combine with spousal pension income splitting, this is well worth your while to look at. Further more, TFSA do not get taxed when withdraw which provides room for tax strategy to maximize these credits and pay less taxes. 

• While non-registered account get lower taxes in capital gains and Canadian dividends, registered account get no taxes at all! It is great to get lower taxes, but better to get no taxes. On a side note you get taxes on your capital gains when you sales your stock. The bonds returns, called interest, are fully taxable and thus better kept in your RRSP & TFSA.  
• Due to the credit and gross up % at the end of the day, eligible dividend and non-eligible dividend get taxes very similarly. 
• At low earnings, less than 10k, you don't get taxed! 

How to use the tool:

• Save the file on your computer.
• Go under the tab EN and modify the input cell in green. 

Tabs:

• EN : Main tab to explore. 
• TaxYYYY : Similar to the FR tab, but with all province reference 

Lexicon:

Gross earnings  : Your salary before any retained earnings or taxed. Likely this is what is written on your employment offers. You should also add your bonus, but some of your employment benefit may be not taxable. Tax are complex. 

Retained earnings: Your employer usually retained some earnings for various government program and for taxes. If you are self employed or if your employer don't do it, then you need to retain some money for next year taxes. 

Net earnings: Your income after taxes   

RRSP : Registered Retirement Saving Plans

QPP: Quebec Pension Plans

CPP: Canada Pension Plans

YMPE: Year Maximum Pensionable Earnings = Average of Canadian Earnings

YAMPE: Year Additional Maximum Pensionable Earnings =  YMPE*114%

Annexe: