Calculation of Income Tax

An individual's income taxes are calculated in 4 steps

  1. Income is totaled from all sources.

  2. Deductions are used to reduce the total income to arrive at the net income and the taxable income.*

  3. The taxes payable on taxable income are calculated according to the respective tax bracket.

  4. Income taxes payable is reduced by applying tax credits.

*Although in many cases the net income and the taxable income are equal, they are not the same, since the net income may also include non taxable income e.g. Workmen's Compensation or Social assistance.

The net income is very important since it is used in the calculation of some credits and deductions. Examples include property tax credits, GST and Child tax credits

The more income tax deductions and tax credits you have, the less taxes you will pay.

Smart tax planning involves minimizing current tax payable and deferring taxes until a later date. Wealth creation and accumulation results from investing the savings in tax efficient instruments as the circumstances dictate.

There are 3 main ways to reduce your income taxes

  • Reduce taxable income: maximize deductions

  • Reduce effective tax rate: e.g. spousal RRSP's, move interest bearing instruments to capital gains

  • Defer taxable income: unrealized capital gains, RRSP's

When used effectively, these 3 ways can create over 100 different tax reduction tactics.

Financial Planning

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