Income and taxation is designed to explain the different sources of income and how income gets taxed by the government. Below is a brief summary from the webinar. 

Income

There are four main sources of income:

• Employment income
• Investment income
• Inheritance
• Unexpected incomes such as lottery winnings or gifts.

Throughout your lifetime, the majority of the money you get will likely be income earned either from working or income earned from investments - having your money work for you.

 

1. Employment Income

For most people, this is where the majority of their money comes from. There are many forms of employment. It could be in the form of a part-time summer job. You or your spouse could work part-time. Are you your own boss and therefore, you would be considered self-employed.

 

While you earn income from your employment, your daycare employees are also earning income from their employment. Yours could be full-time employment income, while your daycare provider could be self-employed, or any combination of these.

 

2. Investment Income

The second type of income is from investments you have made and this should always be viewed as an additional source of funds. In order to receive investment income, you have to “invest” in a product. The most common investment products people invest in are GICs, Bonds, Stocks, Mutual Funds, and Real Estate. In doing so, you are using your savings to “buy” an asset that will hopefully produce an income stream in the future.

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3. Inheritance

The third income source is an Inheritance. An inheritance is a gift of money from someone who has died, to someone the deceased person has chosen, usually a relative or a friend. However, you should never factor in an inheritance into the planning of your finances. They are unreliable, infrequent and generally, not substantial enough to live on. Treat an inheritance as a nice to have if it happens, and only factor it into your financial planning when it actually happens.

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4. Unexpected

Lottery and Gifts are the last source of income but like inheritance, they are unreliable infrequent and not substantial enough to live on. None of these should be included when planning out your finances. They are nice if they happen and can offer a substantial to change your life, but like inheritance, you should only deal with these as they happen.

 

Taxation

Generally speaking, in Canada, all sources of income are taxable unless the government says it isn’t. Canada’s federal tax system looks like a staircase. As you earn more income you reach a point where the tax on your income is stepped up to a higher level. See the graph below:

 

Each step in the staircase is referred to as a marginal tax rate. Marginal tax rate it the rate you will pay on the next dollar earned. Average tax rate is used to calculate how much tax you will pay on your total income. It can also be used to determine the amount of a tax refund from making RRSP Deductions.

 

Taxation on Investment Income

To illustrate how investment income is taxed, let’s use an example. Lets say you earn $1,000 in interest, rental income, dividends, and capital gains and your effective (or average) tax rate is 20%. Interest and rental income will both pay $200 ($1,000 x 0.2) in taxes (they are taxed just like employment income). Capital gains will pay $100 ($1,000 x 0.2/2) in taxes (they are taxed at half of what the rate employment income is). Dividends will pay somewhere around $70 - $120 in taxes (they are taxed at a lower rate than employment income, but the exact amount depends on the dividend type). So clearly, NOT ALL INVESTMENTS ARE EQUAL when it comes to taxation! From a tax perspective, a higher return in the form of interest may be less advantageous than a lower return dividend!

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That brings us to the end of the Income & Taxation module. If you have any questions, feel free to contact me at connor.ryan@rbc.com. The next lesson will be on Banking Services and will be held on Tuesday, February 12th at 6:30 pm. Contact us to register, or fill out the enrollment form on our website.

 

Thank you!

 

Be sure to check out our upcoming financial literacy webinars and other events here.