The whole business of tax brackets and tax rates for citizens of Ontario, and Canada for that matter, can be somewhat confusing. We may sort of understand the concept but do we really get what it does to us. Simply put, the more money we make or earn as individuals the higher the rate of income tax that is applied at the federal and provincial levels. This doesn’t take into account the myriad deductions and exemptions available to us that help reduce the actual amount of our earnings that are taxed.
We all know that we have to pay taxes. It keeps the wheels of government turning and provides services and benefits that need to be administered at the government level. How the various levels of government allocate the money and how efficient and fair they are at providing these services and benefits is up for debate. Nevertheless, taxes are a fact of life. Most of us will pay them for all of our working lives and even beyond.
So what is this business of tax brackets and tax rates all about? For starters, we need to take the money we earn, or gross income, and pare it down to something called taxable income. There are deductions and exemptions that come into play to arrive at this figure. One of the main ones is the basic exemption that we are all entitled to. For the 2016 taxation year the federal exemption will be $11,474. This means that if you earn this amount or less you pay no federal income taxes. Provincial exemption rates vary. Other deductions and exemptions include things like tax credits for children and other dependents, education expenses, medical expenses and so on.
The amount of taxable income you wind up with will determine what tax bracket you wind up in. Depending on your total taxable income, you will be taxed at one or more tax rates for the amount that applies to each tax bracket. For example, your first $41,536 will be taxed at a combined rate of 20.05% for regular taxable income if you reside in Ontario. This represents 15% federal tax and 20.05% Ontario provincial tax. Different rates apply to dividend income and capital gains income. The next bracket is for taxable income over $41,536 and up to $45,282. It is taxed at a combined rate of 24.15%, slightly higher percentage than the previous bracket. The final bracket is for taxable income over $220,000 which is taxed at a combined rate of 53.53%. You get the picture? The higher the bracket that your income falls into, the higher the percent rate it is taxed at.
The trick is to take advantage of every available legitimate deduction and exemption to minimize that taxable income and keep you in the lowest bracket possible. Your tax specialist can help with this. Hope this helps.
Until next time …