Your Client’s 101 on How Canadians Are Taxed

The time is now for your client to take a look at their tax liability for 2022! But how exactly are Canadians taxed and are there ways for your client to reduce their tax liability at the end of this year?

Individuals who reside in Canada are taxed on the worldwide income they receive in the year. There is a federal layer of tax and a provincial layer of tax. The tax rate your client pays depends on the amount of the taxable income they received in the calendar year and the tax brackets they fall into. The 2022 Federal tax brackets are shown in the table below (which are indexed each year for inflation). Each province also has its own tax brackets and rates.

Federal Tax Bracket Rate
Up to $50,197 15.00%
$50,198 – $100,392 20.50%
$100,393 – $155,625 26.00%
$155,626 – $221,708 29.00%
$221,709 and over 33.00%

As you can see, the rate your client pays will be a blended rate depending on their taxable income for the year. They pay Federal tax at 15% on the first $50,197, then the rate increases to 20.50% for income above $50,198 etc. Once their income is over $221,709, then every dollar after that will be at the 33% Federal tax rate. With provincial taxes added on, the top combined income tax rate ranges from 44.50% in Nunuvut to 54.80% in Newfoundland and Labrador.

So, how can your client reduce their income tax liability?

First, they can be intentional about the types of income they receive. Some types of income are more tax efficient than others. If your client earns capital gains, only 50% of the gain will be included in their taxable income, while their employment and investment income will be fully taxed. Withdrawals from your client’s RRSP or RRIF are also fully taxable. Dividends receive preferential tax treatment through the use of the dividend tax credit. There are two types of dividends: eligible and non-eligible dividends. Non-eligible dividends are taxed at a higher rate than eligible dividends. Usually, dividends your client receives in their investment portfolio would be eligible dividends (dividends from publicly traded securities).

Second, there are certain expenditures that they can deduct from their income and tax credits that can reduce your client’s tax liability. The CRA’s website has a page that describes the deductions and tax credits that are available. For employees, there are less deductions than for those who are self-employed. The most common deductions are for RRSP contributions, childcare expenses, capital losses and investment related expenses. The most common credits are for medical expenses, charitable donations and tuition fees. Your client should act now, as the payments related to these deductions and credits must be made before December 31, 2022 to reduce their tax liability (except for RRSP contributions which can be made until March 1, 2023 while still being applied to the 2022 tax year).

Of course, there are also ways for your client to save taxes on income in the long-term by investing in a tax-free savings account (TFSA) or registered education savings plan (RESP), for example. While contributions to these types of plans don’t result in a deduction on your client’s tax return, the income earned in the plans are not taxable while in the plan. For TFSA, there is no tax for your client on withdrawal. For RESP, the funds are taxed in the hands of the student.

Share this article with your client to give them the 101 on how Canadians are taxed. It includes a calculator for estimating their tax liability for the year as well as these year-end tax checklists to help them minimize their 2022 tax liability:

PWC: A planning checklist for individuals and owner-managed businesses.

E&Y: Part 1 – News and information on timely tax topics – November 2022.

E&Y: Part 2 – News and information on timely tax topics – December 2022.

KPMG: 2022 year-end personal tax planning tips (en anglais seulement).

NOW is also an opportune time to check in with your clients and review their overall financial and estate plan which would include your client’s wills, power of attorney and representation agreements, life insurance needs as well as critical illness and disability insurance.

If you have any tax related questions, be sure to reach out to your local PPI Collaboration Centre for more information – we’re here to help!

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Your 101 on How Canadians Are Taxed