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If you're a small business owner or self-employed individual in Canada, you may be eligible to...
In Canada, sole proprietors and employees report their income and expenses on their personal tax returns. Here is a guide on how income tax works for different scenarios, including sole proprietors, employees, and those who are both. The example includes Ontario taxes for simplicity.
Income Tax Rates
In Canada, the progressive tax system plays a key role in government revenue collection. With varying rates depending on income brackets, taxpayers need to understand the different categories and available tax credits to minimize their tax burden. The 2023 rates are:
Federal Tax Rates:
- First bracket: 15% on the first $53,359 of taxable income.
- Second bracket: 20.5% on income between $53,359 and $106,717.
- Third bracket: 26% on income between $106,717 and $165,430.
- Fourth bracket: 29% on income between $165,430 and $235,675.
- Fifth bracket: 33% on income over $235,675.
Provincial Tax Rates (Ontario):
- First bracket: 5.05% on the first $47,630 of taxable income.
- Second bracket: 9.15% on income between $47,630 and $95,259.
- Third bracket: 11.16% on income between $95,259 and $150,000.
- Fourth bracket: 12.16% on income between $150,000 and $220,000.
- Fifth bracket: 13.16% on income over $220,000.
To understand how marginal taxes work in Canada, we break down the applicable federal and provincial (Ontario) rates for an income of $180,000.
Federal Rates
| Income Bracket ($) | Rate (%) | Tax ($) |
|---|---|---|
| 0 - 53,359 | 15% | 8,003.85 |
| 53,359 - 106,717 | 20.5% | 10,182.58 |
| 106,717 - 165,430 | 26% | 15,247.58 |
| 165,430 - 180,000 | 29% | 4,235.70 |
| Total Federal | 37,669.71 |
Provincial Rates (Ontario)
| Income Bracket ($) | Rate (%) | Tax ($) |
|---|---|---|
| 0 - 47,630 | 5.05% | 2,404.32 |
| 47,630 - 95,259 | 9.15% | 4,353.36 |
| 95,259 - 150,000 | 11.16% | 6,101.59 |
| 150,000 - 180,000 | 12.16% | 3,648.00 |
| Total Provincial | 16,507.27 |
Total Taxes
| Concept | Amount ($) |
|---|---|
| Total Federal | 37,669.71 |
| Total Provincial | 16,507.27 |
| Total Tax | 54,176.98 |
Standard Credits and Deductions
Non-Refundable Tax Credits:
These credits reduce the amount of tax owed but cannot reduce the tax liability below zero. Common non-refundable credits include:
- Basic Personal Amount (Federal): $15,000 * 15% = $2,250.
- Spousal or Dependent Amount (Federal): $15,000 * 15% = $2,250 (if spouse has no income).
- Basic Personal Amount (Provincial): $11,865 * 5.05% = $599.18.
- Spousal or Dependent Amount (Provincial): $11,865 * 5.05% = $599.18 (if spouse has no income).
Examples of Other Common Non-Refundable Credits:
- Medical Expenses: Uncovered medical costs.
- Charitable Donations: Donations to registered charities.
- Education Expenses: Tuition and other education-related costs.
Refundable Tax Credits:
These credits can reduce the tax liability below zero, resulting in a refund.
- GST/HST Credit: For low to moderate-income individuals, based on family income.
- Canada Child Benefit: Assistance to families with children under 18 years old.
Simplified Examples
Single Person (Net Income: $60,000, Deductible Expenses: $10,000)
| Concept | Amount ($) |
|---|---|
| Net Income | 60,000.00 |
| Less: Deductible Expenses | -10,000.00 |
| Taxable Income | 50,000.00 |
| Federal Tax on $50,000 | 7,500.00 |
| Basic Personal Credit (Federal) $15K x 15% | -2,250.00 |
| Net Federal Tax | 5,250.00 |
| Provincial Tax on $50,000 | 2,397.00 |
| Basic Personal Credit (Provincial) $11,865 x 5.05% | -599.18 |
| Net Provincial Tax | 1,797.82 |
| Total Tax Payable | 7,047.82 |
Married Sole Proprietor (Net Income: $60,000, Deductible Expenses: $10,000, Spouse No Income)
| Concept | Amount ($) |
|---|---|
| Net Income | 60,000.00 |
| Deductible Expenses | -10,000.00 |
| Taxable Income | 50,000.00 |
| Federal Tax on $50,000 | 7,500.00 |
| Basic Personal Credit (Federal) $15K x 15% | -2,250.00 |
| Spousal Credit (Federal) $15K x 15% | -2,250.00 |
| Net Federal Tax | 3,000.00 |
| Provincial Tax on $50,000 | 2,397.00 |
| Basic Personal Credit (Provincial) $11,865 x 5.05% | -599.18 |
| Spousal Credit (Provincial) $11,865 x 5.05% | -599.18 |
| Net Provincial Tax | 1,198.64 |
| Total Tax Payable | 4,198.64 |
Married Self-Employed and Employee (Salary: $30,000, Business Income: $30,000, Deductible Expenses: $10,000, Spouse No Income)
| Concept | Amount ($) |
|---|---|
| Employee Salary | 30,000.00 |
| Business Income | 30,000.00 |
| Business Deductible Expenses | -10,000.00 |
| Taxable Income | 50,000.00 |
| Federal Tax on $50,000 | 7,500.00 |
| Basic Personal Credit (Federal) $15K x 15% | -2,250.00 |
| Spousal Credit (Federal) $15K x 15% | -2,250.00 |
| Net Federal Tax | 3,000.00 |
| Provincial Tax on $50,000 | 2,397.00 |
| Basic Personal Credit (Provincial) $11,865 x 5.05% | -599.18 |
| Spousal Credit (Provincial) $11,865 x 5.05% | -599.18 |
| Net Provincial Tax | 1,198.64 |
| Total Tax | 4,198.64 |
| Tax Withheld by Employer (Approx.) | -4,000.00 |
| Remaining Tax Payable | 198.64 |
Married Employee (Salary: $60,000, Spouse No Income)
| Concept | Amount ($) |
|---|---|
| Employee Salary | 60,000.00 |
| Federal Tax on $60,000 | 9,000.00 |
| Basic Personal Credit (Federal) $15K x 15% | -2,250.00 |
| Spousal Credit (Federal) $15K x 15% | -2,250.00 |
| Net Federal Tax | 4,500.00 |
| Provincial Tax on $60,000 | 3,030.00 |
| Basic Personal Credit (Provincial) $11,865 x 5.05% | -599.18 |
| Spousal Credit (Provincial) $11,865 x 5.05% | -599.18 |
| Net Provincial Tax | 1,831.64 |
| Total Tax | 6,331.64 |
| Tax Withheld by Employer (Approx.) | -10,000.00 |
| Tax Refund | -3,668.36 |
Business Expense Deductions for Self-Employed Individuals
Self-employed individuals can deduct reasonable expenses incurred to earn business income, subject to certain exceptions. Deductible expenses include:
General Expenses:
- Office and Supplies: Rent, utilities, stationery, etc.
- Advertising: Marketing and promotion expenses.
- Salaries and Wages: Payments to employees.
- Professional Fees: Accounting and legal fees.
- Travel Expenses: Accommodation, meals, and business-related transport.
- Depreciation: Using the Capital Cost Allowance (CCA) for capital assets.
Vehicle Use for Business:
- Fuel: Gasoline and oil costs.
- Repairs and Maintenance: Vehicle upkeep costs.
- Insurance Premiums: Vehicle insurance.
- Loan Interest: Interest on a vehicle loan.
- Depreciation: Using CCA for vehicles.
Home Office Use for Business:
- Portion of Home Expenses: Proportion of home expenses used for business, including:
- Utilities: Electricity, heating, water.
- Maintenance: Home repairs and maintenance.
- Home Insurance: Part of the home insurance.
- Mortgage Interest: Interest paid on the mortgage.
- Property Taxes: Property taxes.
To calculate the proportion of home expenses, a formula based on the space used for business and the time it is used can be applied.
Conclusion
It is essential to keep detailed records of all business income and expenses and to understand the available deductions and credits to maximize tax benefits. Consulting with a tax professional can provide personalized guidance and ensure compliance with tax laws. Schedule a free appointment with us.
