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In Canada, we are legally obligated to report any kind of money we make to the Canada Revenue Agency (CRA). This sounds easy enough, and if you are like most people, this simply means reporting your employment income, which is the amount you see on your T4 slip from your employer. However, it can quickly become much more complicated, to the point where you should seek out a professional to file your taxes, rather than doing it yourself.
Should I file my taxes myself? Well, take a quick look at all the possible types of income on the CRA webpage here. It looks quite daunting, doesn’t it? Not to worry! Although there are 60+ different types of income, we can focus on the most common types, and how they are taxed. For most people, the money they are making won’t fall outside of the categories we’ll be covering here. Let’s take a look at the types of income taxes in Canada.
General income, benefits, and interest income – 100% taxable
The vast majority of income will fall under this category. Here are some common types of taxable income you may have received:
Employment income (sometimes referred to as T4 income, due to being reported on a T4 slip) – This is income from your employer.
Self-employment income – Pretty self-explanatory. If anyone starts their own business or works on commissions and contracts, this income is 100% taxable.
Interest income – Interest you earn from your savings account.
Government benefits – Lastly, if you receive any benefits from the government, such as Canada pension plan or disability payments, it is also 100% taxable.
Dividend income – 100% taxable but with a catch
If you own a company or have shares in any Canadian company, you may have received dividend income. The accounting here is a bit trickier. Even though the income itself is 100% taxable, receiving dividends from Canadian companies entitles you to tax credits. As a result, dividends income ends up saving you tax dollars when you compare it to simply salary income.
Capital gains income – 50% taxable
Capital gains are one of the best ways to earn your income, as only half of it will be taxed. It come in any time there is a sale or transfer of capital property. Here are some common income sources which fall under capital gains:
Real Estate – When you sell any real estate, capital gains will be triggered. So, if an apartment went up $100,000 in value, you would have $100,000 in capital gains. 50% of that ($50,000) would be taxable. Another benefit is that if you sell your principle residence, it’s actually exempt from capital gains!
Stocks – When you sell off any stocks, it will result in a capital gain (or capital loss if you made a poor decision)
Mutual Funds – Many people may have mutual funds, perhaps at the bank or another financial institution. This is also considered capital property.
This is of course, a very simple break down of the different types of income and how they are taxed. Ultimately, you can always go to a professional for advice, especially when it comes to your taxes. A tax professional who knows their stuff will be able to help you reduce your tax obligation and maximize your tax return!
Finjoy Capital is not a financial advisory firm.
This article is for informational purposes only and is not a substitute for individualized professional advice.
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