As tax-season is almost in full swing, I thought I would create a small glossary of the most common tax terms. They are not in any particular order.
Average tax rate: (total amount of tax paid divided by total amount of taxable income) x 100. For example, if you paid $ 5 000 of taxes on a $ 50 000 taxable income, your average tax rate would be 10%.
Marginal tax rate: Simply put, it is the amount of tax you pay on the last -and next- dollar earned. Canada operates on a marginal tax rate and a tax bracket system. The more you earn the more income tax you pay.
There are federal tax rates and provincial/territorial ones. Your province of residence and your level of income determine your marginal tax rate. For example, if you live in British Columbia and makes $ 50 000/year, your rate is 7.70%.
Tax deduction: A deduction against all income earned. It lowers the taxable income potentially reducing tax liability. The most common deductions in Canada are RRSP contributions and childcare expenses.
Tax credit: A deduction against the amount of tax owed. Unlike a tax deduction, a tax credit has no impact on taxable income. Some credits are federal; other ones are provincial/territorial.
Refundable tax credit: A tax credit not limited by the amount of tax owed. If you owe $ 300 in taxes but have a $ 500 refundable tax credit, you will receive $ 200.
Non-refundable tax credit: A tax credit that can’t reduce the amount of tax owed below zero. If you owe $ 300 in taxes and have a $ 500 non-refundable tax credit, it will bring your balance to zero; but you won’t receive a refund.
Taxable income: The amount of income used to calculate taxes. Gross income minus any deduction or exemption allowable.
T4: Form filled in by employers letting employees –and CRA- know how much they were paid and how much taxes were withheld. There are other T4 forms for retirement income.
Tax return: An annual declaration of personal income used to calculate income tax liability. In Canada, individuals have to file and pay on April 30th the latest.
Notice of Assessment: A summary of your tax return sent by CRA.
Notice of Re-assessment: If errors are found in your return, CRA will make the applicable adjustments and send you this form.
CRA review: Verification of your tax return against the information on file. This is different from an audit, in the sense you may not be contacted at all, and there may not be any change to your Notice of Assessment.
CRA audit: Either in-depth verification of your tax return or a spot check on a particular element. You will be contacted by mail and advised of the scope of the audit and what is required.