One of the two most misunderstood concepts in the Canadian tax system is that of “tax brackets”.
I have heard from people over the years that they don’t want to work overtime or get a raise because it will put them in a new tax bracket and “the government will just take it all”. This is just false.
While it is true that higher incomes are taxed at higher rates, our progressive tax system is structured so that everyone pays the same amount on their first $25,000 per year – whether that is all you made or it is what you made in one month.
As Canadians, we are fortunate to live in one of the wealthiest countries in the world. A global study in 2018 found that Calgary is the fourth most “liveable” city in the world with Toronto and Vancouver also in the top 10. However, with that advantage comes the opportunity to share with those who don’t have as much.
We each have a certain amount of social capital – money to support those less fortunate than us. A lot of the time, this money is collected as taxes and administered through a variety of government programs. However, there are also tens of thousands of registered charities in Canada that focus on scientific research, humanitarian relief, community programs, etc. If you take a look, you are guaranteed to find an organization that matches yoru beliefs and values and that does work you find meaningful.
Many people
believe they do not have the funds available to them to donate. While at the
same time, they resent the amount of income tax they pay. There is a simple
answer to both of those concerns.
When you make a
charitable donation to a registered Canadian charity, you can receive federal
and provincial tax credits of up to 50% of the value of the donation. If you
live in Alberta and give $1,000 to a homeless shelter, or a research facility,
or an animal rescue foundation, or a youth sports organization, you will pay up
to $500 less in taxes.
You can choose to personally direct where your social capital is spent instead of giving your money to the government in the form of income taxes and allowing them to make that choice for you through their programs. We all give one way or the other.
You can visit CRA’s website to find out more information about registered charities.
When you have a profitable small corporation, you may wonder if it makes sense to buy or lease a “company car” for yourself. In most cases, we advise against this. Here’s an example:
Let’s say you bought a car on January 1 for $10,000 plus GST. You pay $900 per year for insurance, $2,500 for fuel and maintenance, and $600 for parking. You put 18,000 km on the car in the year – 80% of which is driving for work.
If your company buys the vehicle and pays all the expenses, the total deduction (including CCA or depreciation) will be $5,575. This would save your company $669 in corporate tax.
However, you will also have to take into account that you (the individual) had access to the corporate vehicle and drove it for personal purposes. This would add at least $473 in taxable benefits to your personal tax return. In a 30.5% marginal tax bracket, you will pay $144 in taxes. But with the corporate savings, you are still coming out ahead by $525.
But if you own the car personally and pay all the expenses out of your personal bank account:
The company can then pay you a standard reasonable mileage rate as defined by CRA. For 2018, this would be $7,356 or $883 in corporate tax savings. The best part, is that this reasonable allowance is non-taxable on your personal return, so you keep all the tax savings.
Each situation is different but in most cases, you will save money by purchasing or leasing the vehicle personally. If you have questions about how this would work for you, let us run the numbers for you.
