INCOME TAX
  1. The Canadian Tax System
  2. The Marginal Tax Rate
  3. Deductions from Employment Income
  4. Deductions from Business and Self-employment Income
  5. Federal Nonrefundable Tax Credits
  6. Ontario Provincial Tax Credits

1. The Canadian Tax System

The Canadian Tax System is a progressive tax system. It refers to the fact that the tax rate goes up as your income goes up. In addition to the Federal Income Tax, each province levies own level of income taxes so that continued federal-provincial tax rates differ according to where you live.
The objective of personal tax planing is to minimize or defer income taxes payable. This requires a thorough understanding of Canada's Income Tax Act, plus bulletins and circulars of the Canada Custom and Revenue Agency (CCRA).
The Canadian tax system has four basic tax brackets. Your applicable marginal tax rate increases as your taxable income increases through tax brackets.

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2. The Marginal Tax Rates

Your marginal tax rate is the rate of tax you pay on the last dollar you earned in the year.
Your average tax rate, on the other hand, reflects the actual tax paid after deductions and credits. Your average tax rate is calculated by dividing your total tax (actually paid) by your total income.

Combined Federal and Ontario Marginal Tax Rates - 2007

Income
Ordinary
Income
Gross
Capital Gain
Eligible
Dividend
At $35,488
24.15
12.08
(1.47)
At $37,178
31.15
15.58
7.95
At $62,487
32.98
16.49
8.66
At $70,976
35.39
17.70
12.16
At $73,622
39.41
19.70
14.49
At $74,357
43.41
21.70
20.29
At $120,887
46.41
23.20
24.64

^ eligible dividend range of -1.47% to +3.55% at taxable income $35,488

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3. Deductions from Employment Income

There are four steps involved with calculation of your personal income tax:

    1. Calculate total income,
    2. Make allowable deductions to arrive at taxable income,
    3. Calculate the basic tax payable on taxable income,
    4. Claim tax credits and calculate tax payable.

Examples of employment expenses may include:

    1. Legal expenses,
    2. Automobile expenses,
    3. Office rent expenses,
    4. Rent paid, maintenance, utilities and minor repairs,
    5. Musical instruments,
    6. Assistant's salary and supplies, if required to be paid without reimbursement by the terms of employment,
    7. Union dues and professional fees if required to maintain membership.

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4. Deductions from Business and Self-employment Income

Examples of business and self-employment expenses may include:

    1. Purchases of materials and supplies,
    2. Motor vehicle expenses (such as fuel, insurance, and repairs),
    3. Salaries,
    4. Subcontractors' costs,
    5. Maintenance and repairs (other than motor vehicles),
    6. Equipment rental,
    7. Amortization of capital assets,
    8. Advertising,
    9. Accounting, legal, collection, and consulting expenses,
    10. Office expenses (including postage, stationery, telephone and other supplies)
    11. Property taxes or rent on business property,
    12. Workspace in the home ( when appropriate ),
    13. Traveling expenses ( limitations apply to motor vehicles ),
    14. Representation costs to obtain a business-related licence, permit, franchise or trademark,
    15. Certain group benefits,
    16. Business taxes, fees, licences and dues,
    17. Convention expenses,
    18. Light, heat and water,
    19. Interest and bank charges,
    20. Bad debts,
    21. Business- related memberships and subscriptions,
    22. Delivery and freight,
    23. Insurance ( fire, theft, liability ),
    24. Meals and entertainment expenses,
    25. Management and administration fees,

Business and self-employment expenses must be documented.

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5. Federal Nonrefundable Tax Credits

    1. Basic Personal Credit
    2. Spousal Credit
    3. Equivalent-to-Spouse Credit
    4. Age Credit
    5. Disability Credit
    6. Other Personal Credits
    7. Caregiver Tax Credit
    8. Medical Expense Credit
    9. Tuition Fee and Education Credits
    10. Student Loan Interest Tax Credit
    11. Pension Credit
    12. Charitable Donation Credit
    13. Canada Pension Plan (CPP) and Employment Insurance (EI) Premiums Credit
    14. Investment Tax Credit (ITC)
    15. Political Contribution Tax Credit
    16. Foreign Tax Credit
    17. Overseas Employment Tax Credit ( OETC)
    18. Goods and Services Tax (GST) Credit

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6. Ontario Provincial Tax Credits

    1. Property Tax Credit
    2. Sales Tax Credit
    3. Ontario Home Ownership Saving Plan (OHOSP)
    4. Ontario Child Care Supplement for Working Families
    5. Ontario Political Contribution Tax Credit
    6. Labour-Sponsored Investment Funds (LSIF)
    7. Employee Ownership Labour-Sponsored Venture Capital Corporation Program
    8. Ontario Research Employee Stock Option Credit
    9. Education Tax Credit for Independent Schools ( Equity in Education Tax Credit)

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