Taxing Your Income
The first thing to do is to quickly run through some definitions so that you understand the flow of taxation in arriving at net and taxable income. An image of the first page of the “Income Tax Estimator” will help you to visualize what I am describing.
FIGURE 8.1: Income Tax Estimator
1. Your income from all sources is added up to arrive at your “Total Income.”
2. After subtracting deductions, which include RRSP contributions, CPP contributions, deductible interest and others, you arrive at your “Net Income.”
3. Your “Taxable Income” is calculated by subtracting other allowable deductions from your “Net Income” figure.
For the vast majority of retirees, the taxable income and net income numbers are the same amount.
The Federal Tax Brackets
Taxable income is the figure used in determining the amount of federal and provincial tax payable. After the basic personal exemption to which all taxpayers are entitled, there are four federal tax brackets. Canada has what is called a progressive tax system, which simply means that your rate of tax becomes higher as your taxable income increases. Based on the measure of taxable income for the year, the rate is applied and the amount of federal tax is calculated as shown below. Provinces and territories use the same income brackets but have their own rates and may also have additional intervening brackets. Table 8.2 ...