Part 1 of 1 – Final Journal in the Kismet Ratio Series
It’s the end of the year, things have gone well and you can finally put up your feet and rest, you’ve earned it. But not for too long, because at some point you’ll need to start thinking about those dreaded taxes. To be honest, they can be a real pain in the butt and if you haven’t planned for it, a real kick in the teeth of your bank account. However, that’s if you didn’t plan for it, and since that’s not you, shouldn’t be an issue!
Unfortunately, there are a lot of Canadians who haven’t planned well for the tax season which starts to loom as soon as we finish the year. And even if you have, it’s important to have a general understanding as with all aspects of your wealth management and financial life. We’ve discussed the different types of taxes in Canada in a previous journal which you can browse through if you’re interested. But we’ll give you a quick refresher if that’s all you need.
The four kinds of taxes in Canada are employment tax, interest tax, capital gains tax and dividends tax. Employment income is what we discussed above, when we work a job and earn a salary for it. Simple enough. Interest income is based on the principle of lending and borrowing. When we lend our money, the borrower pays the interest and this amount we gain is considered income. Some common examples of this would be investing in bonds and GIC’s and while we might not have thought of it as lending money, technically that’s what you’re doing. Capital gains is most easily understood as buying an asset, selling it and making a profit off of that sale. Buying and selling real estate is most often thought of when discussing capital gains, but assets can also be stocks, works of art, memorabilia and anything else considered an investment. Dividends comes into play when you are shareholder; you own a percentage of a company, or shares. As the company makes profit, this is divided among the shareholders according to your individual percentages owned and paid out. This is divided profit is considered income, hence the name dividends.
Each of these income types has a different inclusion rate, or the amount of that income that is eligible to be taxed. The amount of tax is based on a progressive tax system which is another way of saying the more money you earn, the more taxes you pay. There are tax brackets and for each bracket you fall under you pay a certain tax rate. The nice thing is that most of this can be calculated at the beginning and throughout the year, so there are no real surprises when the tax man comes knocking.
We use this ratio above to calculate your overall tax rates. That’s inclusive of all the money you earned over the year from all income streams, taking into account all tax brackets, write-offs, etc. This overall number is what we use for you to understand how much you’re paying in tax as well as to see if there are any ways to reduce what you owe.
Ultimately taxes are a part of our modern life in Canada and while there are ways to lower and even avoid taxes, they are a necessary part of a functioning society. We are very fortunate in Canada to have a quality of life which is among the highest in the world and this is due in large part of our tax system. Is it perfect, of course not. Would we all like to pay less taxes, of course! Sadly this isn’t a reality, but with prudent planning and analyzing, we here at Kismet can ensure you’re still smiling at the end of the year.