Money is political.
There, I’ve made a (very, apparently) controversial statement, so now let’s talk about taxes.
Specifically, all the tax terms that are being tossed around in the Canadian election that even I, a certified personal finance nerd, am having a hard time keeping track of.
Tax deductions! Tax credits! Tax rate cuts!
Every political party out there is talking about taxes in some way as a major election issue, and making promises designed to appeal to people based on their tax situation.
But here’s the thing: How many of us are really informed enough to feel confident judging for ourselves whether the tax promises actually align with how we want to vote?
This article isn’t going to break down or keep track of every election promise, because quite frankly, I am not the best person to do that! (Bridget from Money after Graduation is doing a good job with her overviews of the Conservative and Liberal platforms as they relate to personal finance.)
Instead, I want to break down the actual tax terms being tossed around, so you can decipher what’s being promised—and who will benefit from it.
And please know this is written as a basic primer, so of course, talk to your accountant, this is not tax advice, you know the drill.
- What’s a tax rate?
- What’s a tax credit?
- What’s a tax deduction?
- What is tax exemption?
What’s a tax rate?
When politicians talk about tax rates in Canada, it can be a bit confusing, because on an individual basis you don’t always have just one tax rate.
Our tax system is structured so there are multiple different tax rates, based on how much income you make, and the province you live in. If you earn an income in the lowest tax rate in your province and federally, you do actually have one income tax rate—the amount you pay on your income is the amount you pay.
Where it gets trickier is when you earn above that income bracket, and go up into the next marginal tax bracket.
Here’s an example, because that’s a lot of “tax this, tax that” jargon already and we’re like four paragraphs deep.
If you make $30,000, you fall into the first federal tax bracket, so you’ll pay 15% in taxes on your income above $12,069, which is the personal exemption amount in 2019. You won’t pay federal taxes on income under $12,069.
NOTE: This is pretty much all focused on the federal tax rates, which combine with your provincial tax rates to give you your total rate. Since this is a federal election, only the federal rates are being discussed!
Now let’s say you get a new job, and you’re making $60,000. All of a sudden, you’re earning into a new tax bracket, and your marginal tax rate is 20.5%. This does not mean you pay 20.5% on all of your income.
Instead, you still don’t pay any tax on your first $12,069 of income. Then, you pay 15% on your income from $12,069 to $47,630. Finally, you’ll pay 20.5% in taxes on the income you earn above $47,630.
So you now effectively have multiple tax rates. Your federal marginal tax rate is 20.5%—that’s what you pay on the dollars you earned above $47,630—but your average tax rate is less than that, because it includes the lower tax rates you paid on your first $47,630 that year.
In this example, for an income of $60,000 in Ontario, your total marginal tax rate is 29.65%, and your average tax rate is 23.88%. (Here’s the calculator I use for these things.)
ANOTHER NOTE, TO BE CLEAR: Other than that last example, none of this accounts for provincial taxes! Your provincial taxes will be on top of this, so your mileage will definitely vary.
When you hear politicians promising to cut a tax rate, now you can think about it in these terms, and understand how—if at all—it’ll impact your taxes. As an example, last election cycle, the Liberals cut the tax rate for incomes between $47,630 and $95,259. This election cycle, the Conservatives are promising to cut the tax rate on incomes below $47,630.
Those are tax rate promises.
What’s a tax credit?
Here’s how tax credits work. The government essentially decides on a fixed discount on specific categories of spending, that everyone gets regardless of their tax situation.
Let’s say, as a totally made up example, the government brings in a tax credit of 15% for your first $1,000 of Starbucks spending every year.
When you file your taxes, as long as you had receipts for that spending, you’d claim $1,000 of spending at Starbucks, and you’d have $150 (15% of $1,000) taken off of your taxes owing, or added to your tax refund if it was a refundable tax credit. (There are also non-refundable ones that can reduce your taxes owing to $0, but even if you’re eligible beyond that, they don’t create a tax refund.)
It’s basically the government’s way of saying “We like that you spent money on this, we think it’s important for our society, and we want you to keep spending on it, so we’re rewarding you for it.”
Which is why there’s not actually a Starbucks tax credit.
There are, however, pitches out there for tax credits for kid’s art and sports programs, and public transportation. Taking public transportation is good, and the thinking is that a tax credit for the money you spend on it will make it more likely for people to do it. (Whether you agree with that is another story!)
Here are some things to keep in mind about tax credits:
- They only benefit people who are already paying taxes. If you don’t earn any money, or you earn less than the personal exemption amount, there’s no benefit.
- They mostly benefit people who can already afford to spend money on these things ahead of tax time. You only get the money back when you file your taxes, so you’d still need to be able to cover the expenses up-front.
- They give the same benefit regardless of what your marginal tax rate is.
What that means to you probably depends on your personal political views, which is fine, and why different parties make different promises. It’s just a quick list of some of the (potential!) limitations and issues that come up when tax credits are discussed.
What’s a tax deduction?
Tax deductions are where you get back into the world of marginal tax rates.
Unlike tax credits, which offer the same percentage of a “tax discount” to everyone, tax deductions work to reduce your taxes at your marginal tax rate—the highest rate you pay on an extra dollar earned.
Think of it like a way to erase the top amount of money you earned. If you earned $60,000, you’re $12,370 into the 20.5% federal tax bracket. If you stacked up tax deductions that totalled $12,370, you’d be taxed like your income was only $47,630—and your marginal tax rate would be back down into the 15% tax bracket.
At that income level, it’s nice, but as tax rates go up, it can be a big deal. The top marginal tax rate federally is 33%, so a person who can claim a tax deduction in that tax bracket will save more on their taxes than someone in the 20.5% tax bracket.
(Whether you believe tax breaks should get progressively better as you earn more money is a separate, and fairly big, political question.)
There haven’t been any specific promises made yet around tax deductions for the 2019 election, but if you’re looking for an example of a tax deduction, your RRSP contributions are a great one.
What is tax exemption?
Finally, this election cycle we’ve also heard promises about tax exemptions, specifically on employment insurance while on maternity or parental leave.
Basically, it means that if income is treated as tax-exempt, you won’t owe taxes on it at all. It’s like the basic personal exemption—make this much money, through this source, and you won’t be taxed on it.
There’s also a promise out there to raise the personal tax exemption amount to $15,000, up from $12,069.
Based on what we know about tax rates now, we can also see that would save everyone who earns more than $12,069 money, but on a percentage basis, would have the biggest impact on people making $15,000 a year. (Plus, that promise is limited to people earning under $147,000 a year.)
What to remember about taxes in general
All of these types of tax promises in an election are better for some people than they are for others, which is just the nature of political promises. Politicians gonna politician. Understanding who they’re for, and how they work, is part of being an informed voter, which is one of the best things you can do for your finances and the world as a whole.
My personal take is that we’d all be a lot better off with a simplified, streamlined tax system, because part of getting the most of these tax promises is not only understanding them at a conceptual level, but actually knowing how to get the most out of them when it comes time to file your taxes.
Software like Simpletax (no affiliation, just pure love for my tax software of 7 years and counting) can help you optimize and find the tax credits and deductions you’re entitled to, but there are a lot of people who don’t have the knowledge or the resources to do their own taxes—or pay someone to do them.
And my final, spiciest take, is that tax benefits should go to the people who need them most, which sometimes isn’t me and you personally. (It’s definitely not me.) Oh, and also that taxation is pretty secondary to things like making sure everyone has access to things like affordable prescription meds and a planet we can live on for more than the next few decades.
RIP my mentions.