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How tax is calculated?
- Start by totaling your
various sources of income (eg. Employment, Business,
Pensions, Investment) which results in total income
- From this figure you may
deduct certain expenditures (eg. Employment expenses, RRSP
deductions, Child Care, Investment expenses) to reach net
income
- Lastly, you may deduct
“other” specified expenditures (eg. Non-capital and
Net-capital losses of other years carried forward) to result
in taxable income.
This may be a bit
confusing but notice there are three distinct types of income
calculated – total, net, and taxable. Tax is then calculated at
the federal and provincial rates as applicable on your taxable
income. The rate(s) applied depends on your tax bracket and the
province in which you live at December 31. A tax deduction
reduces your taxable income on which tax is calculated. The
actual amount of tax saved depends on your personal tax rate.
For example, if you earned $60,000 in 2006 and contributed
$6,000 to your RRSP, you would save 31.15% where as if you
earned $100,000 and contributed the same amount to your RRSP,
you would save 39.7%.
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Tax Credits?
A tax credit is a
direct reduction of tax. Provided the credit can be used, each
taxpayer receives the same tax relief from a tax credit
regardless of their tax bracket. Tax credits vary depending on
the province in which you live. There is a distinction between
refundable and non-refundable credits. Non-refundable credits
are worthless once you reach the point of paying no tax in the
year. For a summary of the common personal tax credits federal
and BC rates please refer to the CGA/BC publication noted below.
Various tax credits are provided for age, pension income, and
other programs.
'Personal Tax Planning 2005-06 National Edition'
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