The Canadian Tax System

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The Tax System

Canada uses a progressive tax system. The more you earn, the larger percentage of income goes to taxes.The government gets its money primarily through the taxation of income. The methods of taxing income depends on (1) the individual taxpayer's ability to pay, how much money is earned and on (2) the benefits received e.g. goods and services.

The four federal tax brackets are 15%*,22%, 26% and 29%. Provincial taxes vary across the country. In Ontario, there are three tax brackets for individuals 6.05% , 9.15% and 11.16%

* This rate has been capped at 15.0% for the time being.

Is the individual taxpayer paying a fair share of taxes? When you get right down to it, the tax burden of the nation eventually comes to rest on the shoulders of the taxpayer. Whether rich or poor, smart or foolish we all pay taxes. We pay as we earn our money and we pay as we spend it. A vast majority of Canadians still do not understand how their tax system works , but this is slowly changing as as we adapt to changing economic realities.

Most individual taxpayers start out at the lowest level. As income increases through the tax brackets the marginal tax rate also increases. The final tax bill is the sum of the taxes accrued on each segment of income.

One danger which all Canadians face is bracket creep which results from the effect of inflation on tax rates. If inflation is 2%, for example, and you get a pay raise of 2%, your purchasing power or real income remains unchanged. The dollar amount of your taxable income, however, has increased, which might push you into a higher tax bracket. When this occurs your marginal tax rate will rise.

Your marginal tax rate is the rate of the topmost bracket for which your income qualifies and represents the rate you pay on each additional dollar you earn. Whenever you avoid or incur some income tax or you gain or lose on an investment, the dollars in the topmost bracket are affected immediately.

The upper end of low income earners and middle income earners pay most of the taxes collected by the government relative to their incomes. High income earners pay more actual taxes but, generally speaking, are more able to use various tax planning techniques to minimize their taxes, although the Alternate Minimum Tax may restrict them from not paying any taxes at all.

Fortunately, tax planning is not only available to the rich. All income earners could benefit from smart tax planning. A knowledgeable tax advisor who understands the tax system would be a good place to start

You will notice that the difference in tax brackets between an individual income earner of $80,000 and an income earner of $800,000, is only 3%. There is essentially very little difference in their respective marginal tax rates.

The vast majority of taxes is saved by the individuals who own their own businesses. 75% of the of world's wealthiest people own their own businesses.

But although business is for everyone, not everyone is for business. This is why you find only a very small number of individuals willing to make the bold steps necessary for a successful enterprise.

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