In Canada, we often associate the months of February, March and April with the beginning of Spring. From a financial literacy point of view, the three months are when you start to hear a bunch of personal finance terms toss around in articles, on television and radio. Why? Simply put, it is tax season.
Here are 11 financial terms to be familiar with during the upcoming months.
As an investor, any sum of money that you have made from the increase in value of an investment; be it stocks, bonds, mutual funds or real estate. If you have plans to sell your house at a price for more than you purchased it, you will make a capital gain in which you will be taxed upon.
If you have a spouse, you may want to become familiar with the term, “income splitting”. Income splitting permits the higher income taxpayer to reduce net income and taxable income. Although some advisors may recommend this approach to clients, the federal government is looking into closing loopholes to restrict individuals from income splitting.
Notice of Assessment
A Notice of Assessment is a statement from the government notifying you of the amount of tax that owe, if any, the amount of tax already paid, if any, tax credits received and contributions to a Registered Retirement Savings Plan (RRSP). If there is a refund owing, a cheque will usually be included with the statement. If there is an amount owing, payment information will be enclosed. Keep your Notice of Assessment easily accessible for future reference.
Marginal Tax Rate
Your marginal tax rate can be defined as the amount of tax paid on an additional dollar of income. As a result, your marginal tax rate will increase as your income rises to push
you into a higher tax bracket.
A RRSP or Registered Retirement Savings Plan is one of the most common terms that you will hear during tax season. A RRSP is a tax deferral investment tool that allows you to contribute a portion of your income that will not be taxed until it is pulled out of the plan. The term is often mentioned by banks and advisors to prompt individuals to reduce their amount of declared taxable income before the end of April.
Tax credits aims to reduce the actual amount of tax owed. Governments may grant a tax credit to promote a specific behavior, such as replacing older appliances with more efficient ones, or to help disadvantaged taxpayers by reducing the total cost of housing and transportation. There are a variety of tax credits that are made available by federal and provincial governments which are not promoted. Consult the Canada Revenue Agency and Revenu Quebec websites for additional details.
A Tax Free Savings Account (TFSA) is a type of investment that allows individuals to place up to $5500 per year without both levels government being able to tax the amount invested. Although you may place money in your TFSA whenever you want, you will hear advisors remind those who have a TFSA to invest in the account before tax season.
T-slips are reports that document the amount of income that you have generated during the year from various sources such as employment (T4), pensions, retiring allowances, annuities (T4A), and investment income (i.e., interest) (T5). These slips will be sent to you in the mail before or just in time when you will be preparing your taxes. It is important that once you receive the slips file them away to ensure that you do not misplace them. Requesting and receiving copies of the T-slips may take some time and delay sending your documents to the respective tax agencies.
Tax shelters are forms of investments that will allow individuals to reduce the amount of income in which governments can levy tax upon. The most common tax shelters that are available to tax payers in Canada include: RRSPs, TFSAs and RESPs. (It is important to note that tax shelters are not related to tax evasion strategies which are illegal.)
A Registered Education Savings Plan, or RESP, is an investment vehicle used by parents to save for their children’s post-secondary education in Canada. Talk about RESPs during tax season is due to the fact that the vehicle is an option for adults to reduce their taxable income. The maximum amount that parents can put into all RESPs is $50,000.
As the name suggests, a tax refund is a sum of money that governments will give back to tax payers that qualify based on tax credits and deferral strategies.
When it comes to filing your income taxes, it is essential to become familiar with terms that can permit you to keep more money in your pocket and reduce the amount the government can take from you.