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Income Tax and VAT in Canada - some advice please

Income Tax and VAT in Canada - some advice please

Old Nov 12th 2010, 8:47 pm
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Default Income Tax and VAT in Canada - some advice please

I'm not all that clued up on tax so some advice would be great.

I want to compare Canadian income tax and VAT compared to Britain.

I found this website and typed in a random income wage. But I do not quite understand the difference between 'average tax rate' and 'marginal tax rate'. I also do not know what RRSP contribution is or what it means.

here is the website: http://lsminsurance.ca/calculators/canada/income-tax

Could someone advice me on the tax difference between the UK and Canada? I would also like to know what the VAT difference is.

Thank you
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Old Nov 12th 2010, 8:57 pm
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Default Re: Income Tax and VAT in Canada - some advice please

Originally Posted by Jay-Producer
I'm not all that clued up on tax so some advice would be great.

I want to compare Canadian income tax and VAT compared to Britain.

I found this website and typed in a random income wage. But I do not quite understand the difference between 'average tax rate' and 'marginal tax rate'. I also do not know what RRSP contribution is or what it means.

here is the website: http://lsminsurance.ca/calculators/canada/income-tax

Could someone advice me on the tax difference between the UK and Canada? I would also like to know what the VAT difference is.

Thank you
The average tax rate is what it says - it's the amount you pay in tax / the amount you earn.

The marginal tax rate is the tax rate on anything new you might earn.

Tax rates are provincial, but vat here in BC is lower than in the UK (12% as opposed to 20%) - but the overall tax burden is pretty similar.
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Old Nov 12th 2010, 9:10 pm
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Default Re: Income Tax and VAT in Canada - some advice please

Originally Posted by Alan2005
The average tax rate is what it says - it's the amount you pay in tax / the amount you earn.

The marginal tax rate is the tax rate on anything new you might earn.

Tax rates are provincial, but vat here in BC is lower than in the UK (12% as opposed to 20%) - but the overall tax burden is pretty similar.
What do you mean the marginal tax rate is the rate on anything new?

Do you pay the standard 15% federal tax (for upto $40k) plus the provincial tax?
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Old Nov 12th 2010, 9:14 pm
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Default Re: Income Tax and VAT in Canada - some advice please

Originally Posted by Jay-Producer
What do you mean the marginal tax rate is the rate on anything new?

Do you pay the standard 15% federal tax (for upto $40k) plus the provincial tax?
It's the rate on the last dollar you earn, and the next unless that one takes you into a higher bracket.
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Old Nov 12th 2010, 9:20 pm
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Default Re: Income Tax and VAT in Canada - some advice please

Originally Posted by Jay-Producer

I found this website and typed in a random income wage. But I do not quite understand the difference between 'average tax rate' and 'marginal tax rate'. I also do not know what RRSP contribution is or what it means.
Average tax rate is:

total tax paid / total income x 100

Marginal tax rate is the amount of tax you paid on the last dollar you earned.

As a very simplified example, say you earn $50,000. This is taxed at:

10,000 @ 0% = 0
20,000 @ 20% = 4,000
20,000 @ 30% = 6,000

Total tax is $10,000

Average tax rate 10,000/50,000 x 100 = 20%
Marginal tax rate is 30% because you paid 30 cents in tax on the last dollar you earned.

I would also like to know what the VAT difference is.
This depends on the province. Most provinces have GST or HST which operates just like VAT in the UK (except that it is not usually included in advertised prices). The rates are: Alberta 5%, BC 12%, Ontario 13% and The Maritimes 15%.

Quebec has its own tax but the combined effect of federal and provincial taxes is around 13% I think.

Other provinces have both a federal sales tax of 5% and a provincial retail sales tax of (I think) 10%. The RST operates very differently to the GST/HST or VAT in the UK. It is more like the sales taxes in the US.
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Old Nov 12th 2010, 9:27 pm
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Default Re: Income Tax and VAT in Canada - some advice please

Originally Posted by Jay-Producer
I also do not know what RRSP contribution is or what it means.


Thank you
And, since Jonboy missed this, RRSP (=Registered Retirement Savings Plan).

You can elect to put a certain percentage (18%?, Jon?) of your income up to a maximum of $28k this year I think, into such a plan and the contribution is tax free until you withdraw it, in principle after retirement.

You have something similar in the UK but I'm not sure what it's called.
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Old Nov 12th 2010, 9:39 pm
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Default Re: Income Tax and VAT in Canada - some advice please

Originally Posted by Novocastrian
And, since Jonboy missed this, RRSP (=Registered Retirement Savings Plan).

You can elect to put a certain percentage (18%?, Jon?) of your income up to a maximum of $28k this year I think, into such a plan and the contribution is tax free until you withdraw it, in principle after retirement.

You have something similar in the UK but I'm not sure what it's called.
18% of last year's earned income to a maximum of $22,000 in 2010. (Plus any unused contribution room brought forward.)

You deduct the contribution from your taxable income in the year you make the contribution and this reduces the amount of tax you owe, or generates a refund. The funds inside an RRSP grow tax free. You can withdraw funds at any time* but they are taxed at your marginal rate in the year of withdrawal. As Novo says it is intended to be a retirement plan so you withdraw funds when your earnings, and therefore marginal tax rate, are lower than when you contribute. Effectively the RRSP defers, then reduces, the tax you would otherwise pay.

*After age 71 the RRSP morphs into a RIFF and this has to be withdrawn is specified amounts over 15 years.
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Old Nov 12th 2010, 9:55 pm
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Default Re: Income Tax and VAT in Canada - some advice please

Originally Posted by JonboyE
Average tax rate is:

As a very simplified example, say you earn $50,000. This is taxed at:

10,000 @ 0% = 0
20,000 @ 20% = 4,000
20,000 @ 30% = 6,000

Total tax is $10,000

Average tax rate 10,000/50,000 x 100 = 20%
Marginal tax rate is 30% because you paid 30 cents in tax on the last dollar you earned.
Still confused on this. How did you work out 20% or 30% I do not understand how you put 20% on 20k and 30% on another 20k?

In the UK its simple. You pay NI and Income tax and that's it. Simple and straight forward.
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Old Nov 12th 2010, 10:10 pm
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Default Re: Income Tax and VAT in Canada - some advice please

Originally Posted by Jay-Producer
Still confused on this. How did you work out 20% or 30% I do not understand how you put 20% on 20k and 30% on another 20k?

In the UK its simple. You pay NI and Income tax and that's it. Simple and straight forward.
It is just as simple here. For all intents and purposes the same. You have CPP and EI instead of NI. Tax rates are progressive, just like the UK, You pay no income tax on the first money you earn, a low rate of income tax of the next amount of income you earn. As you earn more each successive band of income is taxed at a higher rate until you reach a maximum rate. There are more bands in Canadian taxation but the way it operates is very similar to the UK.

The example I used approximate income tax rate bands for BC. 20.06% is the lowest tax rate. The marginal rate for people earning between $41k and $71k is 29.70%.

Last edited by JonboyE; Nov 12th 2010 at 10:13 pm.
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Old Nov 12th 2010, 10:24 pm
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Default Re: Income Tax and VAT in Canada - some advice please

Originally Posted by Jay-Producer
In the UK its simple. You pay NI and Income tax and that's it. Simple and straight forward.
It is equally as simple here. You pay tax, the amount of which depends upon how much you earn. (Just like the UK). That tax has both a federal and provincial component. Or to put it another way, you pay the federal bit whereever you live and the provincial bit varies depending where you live. Instead of NI you will pay EI and CPP. Plus your RRSP or (if you are lucky) pension contribution.
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Old Nov 12th 2010, 10:25 pm
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Default Re: Income Tax and VAT in Canada - some advice please

Originally Posted by Novocastrian
And, since Jonboy missed this, RRSP (=Registered Retirement Savings Plan).

You can elect to put a certain percentage (18%?, Jon?) of your income up to a maximum of $28k this year I think, into such a plan and the contribution is tax free until you withdraw it, in principle after retirement.

You have something similar in the UK but I'm not sure what it's called.
**** me. Professoring must pay well if you can afford to put 18% of your salary in an RRSP!
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Old Nov 12th 2010, 11:15 pm
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Default Re: Income Tax and VAT in Canada - some advice please

Originally Posted by Atlantic Xpat
**** me. Professoring must pay well if you can afford to put 18% of your salary in an RRSP!
Even worse. I can't because of the absolute maximum contribution.

**** you, indeed.
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Old Nov 13th 2010, 9:22 am
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Default Re: Income Tax and VAT in Canada - some advice please

Thanks for everyone's help. Its not quite the same if you have 4 different tax and NI rates. In the UK there is just one tax rate (changes obviously depending on income) for the whole of the UK you do not pay a territorial tax on top of that. We have a NI contribution not two separate ones like CPP and IE.

So instead of adding two simple equations you have to do it with 4 which various depending on which providence you live in. This is what makes it a little more complex to get your head around. Its easy if you know and know the rates, its not if you don't.

If I am correct:

CPP (Canadian Pension Plan) is at: 4.95%
EI (Employment Insurance) is at: 1.73% (employer makes a contribution of 2.422%)
Federal Tax rate is at: 15% (up to $40k or round abouts that)
Monitoba (lets take this one as its the most expensive) is at: 10.8% (on the first $31k income earned)

In total the maximum you would get taxed (providing you earn 31k or less) is 32.48%??? seems like a hell of a lot of tax.

Do you need to make that 4.95% towards a Canadian pension Plan? i.e. is it compulsory. Same question with EI? Isn't the employer in Canada legally liable to give you sickness pay? In the UK I get sickness benefit and do not pay any extra to receive this. Bit of a farce that in Canada you seem to have to pay for this out of your wages. I can understand if this is medical insurance to pay for hospital bills.

What I don't quite understand is that if you need to make contributions towards this EI what happens if you move company does the employers contribution get moved in a pot so that you don't lose that 2.4% contribution?
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Old Nov 13th 2010, 11:04 am
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Default Re: Income Tax and VAT in Canada - some advice please

Originally Posted by Jay-Producer
Thanks for everyone's help. Its not quite the same if you have 4 different tax and NI rates. In the UK there is just one tax rate (changes obviously depending on income) for the whole of the UK you do not pay a territorial tax on top of that. We have a NI contribution not two separate ones like CPP and IE.
Thanks for explaining the UK tax system. It's not as if people who once lived there would understand it at all.

So instead of adding two simple equations you have to do it with 4 which various depending on which providence you live in. This is what makes it a little more complex to get your head around. Its easy if you know and know the rates, its not if you don't.
The priniciples are the same. There is a variation in part of your tax burden dependent upon where you live.

If I am correct:

CPP (Canadian Pension Plan) is at: 4.95%
EI (Employment Insurance) is at: 1.73% (employer makes a contribution of 2.422%)
EI and CPP are deducted upto a certain level. (I believe it equates to a salary of $45k or so.) If you earn more, once you have paid your deductions, at some point in the year your take home increases. (depends on how much you earn.)

Federal Tax rate is at: 15% (up to $40k or round abouts that)
Monitoba (lets take this one as its the most expensive) is at: 10.8% (on the first $31k income earned)

In total the maximum you would get taxed (providing you earn 31k or less) is 32.48%??? seems like a hell of a lot of tax.
As in the UK there is also a tax free amount you can earn - your personal allowance. Again, there is both a federal and provincial allowance to be applied against the appropriate tax.

Do you need to make that 4.95% towards a Canadian pension Plan? i.e. is it compulsory. Same question with EI? Isn't the employer in Canada legally liable to give you sickness pay? In the UK I get sickness benefit and do not pay any extra to receive this. Bit of a farce that in Canada you seem to have to pay for this out of your wages. I can understand if this is medical insurance to pay for hospital bills.

What I don't quite understand is that if you need to make contributions towards this EI what happens if you move company does the employers contribution get moved in a pot so that you don't lose that 2.4% contribution?
EI covers unemployment insurance, sick pay (for long term sick), maternity/paternity leave. You have to pay it (as you do CPP) and it makes no difference when and if you move employer. You are still entitled to the benefit assuming you have paid in enough. (Commonly referred to as having enough hours.)

The Canada Revenue Agency has a basic introduction to taxation course online: http://www.cra-arc.gc.ca/tx/ndvdls/d.../menu-eng.html . I believe it would profit you to spend some time studying this.
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Old Nov 13th 2010, 1:25 pm
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Default Re: Income Tax and VAT in Canada - some advice please

CPP and EI are capped, so you pay the 4.95% and 1.73% up to a predefined monetary limit which for 2010 is $2163.15 and $747.36 respectively. So the more you earn, the sooner you hit the cap and stop paying for that year.. Then you start again in January. So just when you get used to the extra money, they take it away again just after Christmas! Nice...
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