Make In Canada To Reduce The Amount Of Income Tax One Has To Pay?
Q: I have heard that in Canada, one payes around 45% of his income in taxes. In the US, one could buy real estate and deduct the interest. One could also deduct up to $12,000 in 401k. What kind of deductions one can make in Canada to reduce the amount of income tax one has to pay?
A: If stats2000's 45% figure was supposed to represent only income tax, it's way off. He may have been confusing the "marginal rate" for the top tax bracket (i.e., how much of the last dollar you earned gets eaten up by income tax) with the total percentage of one's entire income that goes to income tax. In actual fact, most Canadians pay far, far less than 45% of their entire gross income in income tax. On the other hand, if stats2000 was talking about the total amount of all taxes of all kinds (the "tax freedom day" idea), then 45% is actually a bit low. For 2002, the average Canadian tax bill (counting all taxes from all levels of government) was about 49% ("tax freedom day" = June 28). But this includes sales tax, prop- erty tax, etc., etc. If you're going to compare Canadian taxes with, say, US taxes, be sure to take things like the following into account in order to get a complete picture: Payroll taxes -- such as US FICA (Social Security), or Canadian CPP (Canada Pension Plan) and EI (Employment Insurance -- once called UI or Unemployment Insurance). CPP+EI is significantly less than FICA, by the way. State income tax -- easy to overlook because most Canadians pay both federal and provincial tax on a single combined return. Health insurance -- built into the tax structure in Canada, but not in the US; you should probably add health insurance premiums to your US tax bill in order to get a fair comparison. Sales tax -- Canadian typically pay about 15% (varies from one province/territory to another), which is a lot more than any US state. Canada doesn't have a US-style mortgage interest deduction. On the other hand, the tax credit in Canada for charitable donations is more generous than in the US. First, most of the credit is computed at the top marginal tax rate, even for low- and middle-income tax- payers. Also, since Canada doesn't have a "standard deduction", even a modest charitable donation will help most taxpayers. Canada has an income deduction for retirement savings plans called RRSP's. These are similar to US IRA's, but the contribution limit is much higher, and there are far fewer restrictions on withdrawing