Do you ever find that when tax lingo starts flying around at tax time, most of it goes right over your head?
Filing and paying taxes involves more than reporting your income to the government. There are a lot of nuances to consider when it comes to preparing your taxes properly as well as ensuring you are taking advantage of eligible credits and deductions.
In order to manage your finances in a more tax-friendly way, it’s helpful to know what many of these terms mean. Here is a list, from A to Z, of some common tax terms explained:
This is the income leftover after you subtract all of your federal and provincial taxes and employment deductions such as CPP (Canadian Pension Plan) and EI (Employment Insurance).
A tax audit occurs when the CRA (Canada Revenue Agency) examines your tax return to verify that your income and deductions are accurate.
Canada Child Benefit (CCB)
The Canada Child Benefit (CCB) is a tax-free monthly payment received by eligible families with children under the age of 18. It helps to offset the costs of raising children and may also include the child disability credit if applicable.
Canada Pension Plan/Québec Pension Plan Benefits (CPP/QPP)
The Canada Pension Plan (CPP) or Québed Pension Plan (QPP) replaces part of your income after you retire. This is a taxable benefit and the amount you receive depends on your average earnings while you worked.
A dependent is an individual who relies on your income. You can claim the dependent tax credit for spouses (if their net income is less than $13,808), children under the age of 18 (unless they are older and have a mental or physical infirmity), and parents/grandparents (if they are dependent on you and live in your home).
Employment Insurance Benefits (EI)
Employment Insurance Benefits (EI) is available to individuals who have lost their job through no fault of their own. It is also used to cover maternity/parental leave, sick leave and, recently, CERB payments. These benefits are taxable in the year in which thhey are received.
The GST/HST credit is paid out to individuals depending on how much money they earn. Those with lower incomes may receive this payment quarterly (four times per year) to offset the GST/HST they pay. This credit is tax-free.
Information slips are forms used by employers, trusts, and businesses to inform taxpayers and the CRA (Canada Revenue Agency) of how much income was earned and how much tax was deducted.
The CRA takes into consideration interest earned on investments along with annual earnings. This includes foreign interest, dividend income, foreign income, and foreign non-business income.
Land Transfer Tax (LTT)
Land Transfer Tax (LTT) is a one-time tax you pay when you purchase a home in all provinces and territories except for Alberta and Saskatchewan. In these provinces, there is only a small transfer fee. The tax amount varies by province but is usually calculated based on a percentage of the property value.
NetFile is an electronic tax-filing service that allows you to do your personal taxes using NetFile-certified tax software and send your return directly to the CRA (Canada Revenue Agency).
Non-Refundable Tax Credits
Non-refundable tax credits are used to reduce the amount of federal tax you pay. However, these credits do not contribute to your tax refund if you are eligible for you. In Canada, you can claim the non-refundable tax credit for their personal amount.
There are some incomes, such as the GST/HST credit or CCB (Canada Child Benefit) that are not considered taxable. These are known as non-taxable earnings.
Refundable Tax Credits
Refundable tax credits reduce the total amount of tax you pay and can contribute to your tax refund. Examples of this would be the GST/HST credit and the Working Income Tax credit.
Registered Retirement Savings Plan (RRSP)
A Registered Retirement Savings Plan (RRSP) is a savings plan for retirement in which the amount you contribute is deducted from your taxable income. However, any amounts you withdraw from your RRSP are added to your taxable income.
When you earn an income from a business that you operate or from freelancing contracts, whether you are a sole proprietor or work with a partner, this is considered self-employment income.
There are four income tax brackets you may fall into depending on your income. This determines your rate of tax. Up until a certain amount is taxed at 15% and anything beyond that amount is taxed at a higher rate.
Tax Credits and Deductions
Any amount that reduces the amount of tax you have to pay is considered to be a tax credit. They can be refundable or non-refundable.
A deduction, on the other hand, can lower your taxable income as well as the tax rate used to calculate your tax.
Tax-Free Savings Account (TFSA)
A tax-free savings account (TFSA) is an account that allows Canadians over the age of 18 to save money and earn tax-free interest. You are also not charged taxes on the amounts you withdrawal. However, you can’t use contributions to a TFSA to lower your taxable income.
Your taxable income is your total income and determines how much income tax you need to pay. This includes wages, capital gains, and other earnings for the tax year, minus deductions and losses.
Tuition Deductions and Education Credits
The Tuition Tax Credit allows students 17 years and older enrolled in a higher education institution to use their school tuition fees to reduce their taxable income. They can also transfer up to $5000 worth of credits to a spouse/common-law partner or parent/grandparent.
The Student Loan Interest deduction applies to government student loans and allows you to deduct the interest on those loans from your taxes.
Have More Questions?
If ever you come across a tax term you don’t understand, or struggle to comprehend your finances and tax returns, don’t hesitate to contact our expert accountants at Liu & Associates!
We are ready and dedicated to helping you file your personal, corporate, and estate taxes as well as help you understand the entire process.