Will You Owe Tax at Tax Time?

By Randall Orser | Personal Income Tax

Whether or not you end up owing tax depends on many factors. If you’re employed, and don’t have income other than from your employment, then you probably won’t end up owing anything. On the other hand, if you’re self-employed, more than likely you’ll end up owing something at tax time.

Employed Person

While being an employee and getting a T4 slip at the end up of the year, you may not think you’ll end up owing on your taxes, but that may just not be the case. Do you have other income such as investments (dividends or capital gains), or withdrawals from an RRSP? Maybe you have a rental property?

Any income you earn outside of your job will cause you to owe money at tax time. How much you’ll owe will depend on what your employment income was. You have to be careful and monitor your other income during the year, so, if you do owe tax come April it’s not a complete surprise and you’ve saved up for it. Or, you’ve made instalment payments to your income tax account with CRA and you don’t have to worry about a payment in April as it’s already paid for.

Your other income may actually put you into another tax bracket, so be careful when withdrawing RRSPs and such. For 2017, the federal tax brackets are:

  • 15% up to $45,916
  • 20.5% on $45,917 to $91,831
  • 26% on $91,832 to $142,353
  • 29% on $142,354 to $202,800
  • 33% above $202,800

Where is your employment income now? And, what will your additional income be? Where does it fit into the above scale? Your tax rate will change depending on the level of income.

If you have a total income of $107,000 then you’re in the middle tax bracket of 26%. You don’t pay 26% on the full $107,000 you pay approximately: $6887(15%) on the first $45,916, $9413 (20.5%) on the next $45,915, and $3,944 (26%) on the rest for a total of $20,244.

Your employment income may have only been $85,000 and federal tax on that would be about $14,899. In this case you pay about $5,345 on the additional income of $22,000.

As you can see having that additional income can me quite a bit more tax when it pushes you into a higher tax bracket. You may be wondering how to alleviate this tax, and the best way is RRSPs. Take your profits from the other incomes and put that into RRSPs, at least you can reduce the tax you owe.

Self-employed Person

As a self-employed person, you pay income tax based on your net income (revenue less expenses), so your tax owing can vary quite a bit from year-to-year depending on how your business is doing. Any year you have a loss, it will be first applied against any other income you have, and the balance will be carried forward to the next year; you can also carry a loss back if the prior year was profitable.

Where your income fits in the above brackets is how you will be taxed. The more you make, the more you end up paying in taxes. You can alleviate tax owing by doing RRSPs, and other deductions such as spousal (if you spouse’s net income is low); tuition credits for yourself, spouse or children; child care expenses; and more.

Ideally, the goal with a business is to get the income as low as possible for tax purposes. Though, be warned, this could bite you later when trying to get personal loans or mortgages as your income may be too low for the banks.

The following, as per Canada Revenue Agency, may be considered when determining operating expenses:

The above are based on what CRA has classified as expenses per the T2125 Statement of Business or Professional Income, which you file with your personal taxes each year. The links are to CRA’s definition of that expense. You can deduct other expenses as will fit into your business, however, CRA may not allow it for tax purposes. For example, speeding tickets, parking fines are not allowed as a deduction for tax purposes, though in your books you can write those off as they are considered a part of doing business.

Note: the above calculations are for federal tax, every province and territory also levies an income tax. Those rates can be found here.

Whether or not you owe tax at tax time will depend on many factors, most notably what are your total income from all sources for the calendar year. It may be a good idea come December to figure out what your total income is, estimate your taxes owing, and make an instalment payment to cover the taxes rather than owe at amount at tax time.

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