Want to know about the minimum income required to start paying taxes in Canada? I’ll detail everything you need to know about this question below!
Minimum Income Threshold for Paying Taxes
Basic Personal Amount
In Canada, you generally don’t have to pay federal taxes if your annual income is below a certain threshold.
This threshold is called the Basic Personal Amount (BPA), which is a non-refundable tax credit available to all individuals.
You can earn a personal income of up to $15,000 without paying federal taxes in Canada for the 2023 taxation year, which will be indexed for inflation in subsequent years.
Note though, that this is federal taxes only, and you might have to pay provincial taxes, depending on where you live.
Provincial and Territorial Differences
Aside from the federal BPA, each province and territory sets its own personal amounts, which can vary significantly. Therefore, your income tax liability might also depend on where you live in Canada.
To determine your specific tax obligations, you should consult the tax laws and regulations in your province or territory.
Keep in mind that even if your income is below the federal and provincial or territorial thresholds, you might still need to file a tax return to claim certain benefits and credits.
Basic Income Tax Concepts
Federal and Provincial Tax Rates
In Canada, income taxes are levied on both federal and provincial levels. Federal tax rates are the same across the country, while provincial tax rates depend on the specific province you reside in.
The federal tax rate starts at 15%, and the rate increases as your income grows higher. Provincial tax rates vary, with each province having its distinct set of brackets and rates.
Tax Brackets and Progressive Tax System
Canada employs a progressive tax system, meaning that higher levels of income are subjected to higher tax rates.
This approach ensures that those who make more money are contributing a larger share of their income to the public purse.
Tax brackets define the range of income subject to a particular tax rate, and as your income increases, you move into higher tax brackets, paying a greater percentage of your income in taxes.
Taxable Income and Credits
Your taxable income is the portion of your earnings subject to tax, and it is calculated by taking your total income and subtracting all eligible deductions and non-refundable tax credits like the basic personal amount.
Tax credits are available to help reduce your tax bill further. These credits include the spouse or common-law partner amount, the eligible dependant amount, and a variety of other credits such as disability credits, eligible expenses for medical purposes, and more.
It is essential to be aware of tax credits and deductions you may be qualified for, as they can significantly lower your tax liability.
Determining Your Tax Obligation
It’s essential to understand your tax obligation as a Canadian resident. This section provides an overview of the factors that determine when and how much income tax you need to pay.
Tax Return and Canada Revenue Agency
Filing a tax return is important to calculate the amount of taxes you owe based on your income. The Canada Revenue Agency (CRA) is responsible for administering income tax laws. You might receive an instalment reminder from the CRA if you are expected to make tax instalments throughout the year.
Federal and Provincial Tax Brackets
Income tax rates in Canada consist of federal and provincial tax brackets. Your tax rates are based on the total taxable income, such as earned income, capital gains, investment income, and bank interest you receive throughout the year.
Employment and Investment Income
Employment income refers to the money you earn from your job, while investment income refers to money earned from various investments, including bank interest and capital gains.
Employment Income Your employment income is taxed based on your income level and province of residence. To determine your employment income tax obligation, you need to consider:
- Your gross income
- Deductions such as Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and Registered Retirement Savings Plan (RRSP) contributions
- Taxable income
- Tax credits and deductions
Investment Income Investment income can include capital gains and interest from savings accounts, bonds, or other investments. These types of income are subject to different tax regulations and rates when compared to regular employment income:
- Capital gains are taxed at 50% of your gains
- Bank interest is taxed at your marginal tax rate
Tax Deductions and Credits
In Canada, there are several tax deductions and credits you can take advantage of to reduce your tax liability. This section will discuss some key parts such as RRSP Contributions and Benefits, Non-Refundable and Refundable Tax Credits, Child Care, and Medical Expenses.
RRSP Contributions and Benefits
Contributing to a Registered Retirement Savings Plan (RRSP) can help you save for retirement while reducing your taxable income.
Your contribution room is the maximum amount you can contribute to your RRSP each year. When you make contributions, you can deduct them from your taxable income, which can result in a lower tax bill.
Keep in mind that withdrawing from your RRSP before retirement may result in taxes and penalties.
There are exceptions, such as the Home Buyers’ Plan and Lifelong Learning Plan, that allow tax-free withdrawals for specific purposes.
Non-Refundable and Refundable Tax Credits
There are two types of tax credits available to you on a federal and provincial level: non-refundable and refundable tax credits.
Non-refundable tax credits reduce the amount of tax you owe, but they won’t result in a refund if your tax liability goes below zero. Some examples include the basic personal amount and the Canada Training Credit.
Refundable tax credits, on the other hand, can be paid to you even if your tax liability is lower than the credits earned. The Canada Child Benefit is a popular refundable tax credit that provides financial support for families with children under 18 years old.
Child Care and Medical Expenses
If you’re paying for child care services while you work or study, you may be eligible for the Child Care Expense Deduction.
This deduction can help lower your taxable income and the amount of tax you owe. Make sure to keep track of your childcare expenses and save all related receipts.
Additionally, you can claim medical expenses for yourself, your spouse or common-law partner, and your dependents. This includes out-of-pocket costs for medical services, prescription medications, and medical devices not covered by your insurance.
Additional Information for Taxpayers
Self-Employment and Side Hustle Income
If you’re self-employed or have side hustle income, keep in mind that this income is taxable and must be reported on your personal income tax return.
The Canada Revenue Agency (CRA) considers you self-employed if you earn income from a business, profession, or commission. Make sure to properly track and report your income and expenses to avoid any surprises when filing your taxes.
Canadian Residency and Tax Obligations
Your tax obligations in Canada depend on your residency status. If you’re a Canadian resident, you are required to pay taxes on your worldwide income.
To determine your residency status, the CRA considers factors such as significant residential ties, a regular presence in Canada, and your purpose for staying in Canada.
Non-residents are subject to taxes only on the income earned within Canada.