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Ontario|Tax LawRules for Individuals 173 Tax rates: How much do you have to pay? The federal and Ontario government each levy and collect income tax. However, the taxes are combined so that the tax payer only files one tax return, and pays the combined tax total which the governments then divide. The amount of tax you are required to pay will depend on the amount of income you earned during the year and the deductions and credits you claimed. In most cases, you are also required to pay tax on investment income earned in the year even if it is not received until the next calendar year.
- Tax brackets explained
Depending on the amount of income you earn, you will fall within one of three tax brackets. Each tax bracket is taxed at a different rate. The system is based on what is called graduated tax rates. This means that if your income increases so that you enter a new tax bracket, only the amount of your income that falls in the higher tax bracket gets taxed at the higher rate.
- Rates of tax
There is a federal and a provincial tax rate that together are called the combined tax rate. In addition to the combined rate there are surtaxes that primarily apply to incomes in the highest tax bracket.
- Reducing tax payable: deductions and credits
There are two main ways to reduce the amount of tax you pay: first, by claiming deductions and second, by claiming credits.
First, deductions are amounts you can subtract directly from your income before calculating tax. There are not as many deductions for employed individuals in comparison to individuals who carry on a business. However, some common deductions for individuals include support payments made to an ex-spouse, contribution amounts to an RRSP plan up to your annual maximum, and moving expenses if you had to move more than 40 kilometers because of work.
The second way to reduce the amount of tax you pay is through tax credits. Tax credits are subtracted from the amount of tax you owe. The most common credit that everyone can claim is a basic personal tax credit which allows you to subtract an amount set by the federal government. There are also credits for medical expenses which equal over 3% of your income or $1500 whichever is smaller, and for college or university tuition.
- When tax must be paid
Most employers deduct an amount for taxes from your pay cheques, and submit it to the federal government on your behalf. If your employer has not deducted enough during the year, you will have to pay tax when you file your tax return. If your employer deducted too much because you have deductions or credits to claim, you will usually get money back after you file your return for the year.
Many people prepare their own tax returns either by carefully following the steps in the tax return packages provided by Canada Revenue Agency, or by purchasing a computer program that will ask you to input information and then calculate your taxes. To find out how much tax you must pay and the types of deductions and credits you are eligible for, you can also consult an accountant or a tax filing service.
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