Taxes are a part of life in Canada and for many people they are a source of stress and confusion. With changing tax laws and so many rules to keep track of, myths can grow. Consult with a tax accountant Victoria on the common tax myths and how they impact you. We’ll also debunk some of the most common tax myths that Canadians believe, and help you make informed decisions about your taxes.
Myth 1: “Deductions are the same as credits”
One of the most common tax myths is that deductions and credits are the same thing. While both can reduce your taxes, they work very differently. A deduction reduces your taxable income, which in turn reduces the amount of income you are taxed on. For example, if you make $50,000 and claim a $5,000 deduction, your taxable income becomes $45,000, and you may pay less tax.
A tax credit reduces the amount of tax you owe, dollar for dollar. For example, a $1,000 credit means you owe $1,000 less in taxes, regardless of your income. Credits can be non-refundable (where they bring your tax bill to zero but don’t result in a refund) or refundable (where they can result in a refund if they exceed the amount of tax you owe).
Myth 2: You don’t have to file if you’re under the tax-free threshold
Many Canadians believe if they make below a certain threshold they don’t have to file a tax return. While it’s true you may not owe taxes if your income is low, it’s still a good idea to file. Filing allows you to access things like the Goods and Services Tax (GST) credit, provincial rebates or the Canada Child Benefit which are based on your filed tax information.
Filing also ensures you have a record of your income and any taxes you paid throughout the year. If your income increases in the future, having filed a return in previous years helps establish a tax history. Always seek advice from a tax accountant Vancouver on your tax filing obligation.
Myth 3: “The more you make the more you pay in taxes”
While it’s true Canada has a progressive tax system where higher earners pay a higher percentage of their income in taxes, it’s a myth to assume higher earnings always means a much bigger tax bill. In Canada, tax rates increase in steps or “brackets”. This means only the income within each bracket is taxed at that rate. For example, if your income exceeds the lower tax bracket threshold, only the amount above that threshold is taxed at the higher rate.
Higher earnings don’t mean a bigger tax bill across your entire income. Many Canadians are surprised to find their overall tax rate is much lower than they thought because of the progressive system.
Myth 4: Refunds are free money
A common myth is that getting a refund means you’re ahead financially. In reality, a refund is the amount of tax you overpaid during the year. For example, if you had too much tax withheld from your pay cheque or made too many prepayments on your taxes, the government will return the excess. While it’s nice to get a refund, it’s important to remember this is your money being returned and it’s not “free money”.
Instead of overpaying taxes throughout the year and getting a big refund, it’s often better to adjust your withholdings so you keep more of your money upfront. This way you avoid giving the government an interest-free loan and can invest or save the money throughout the year.
Myth 5: You don’t have to report small amounts of extra income
Many people believe small amounts of extra income such as freelance work, side jobs or selling things online, don’t have to be reported to the Canada Revenue Agency (CRA). This is a myth. Regardless of how small the amount, any income you earn is taxable and must be reported on your tax return.
Not reporting income can lead to penalties, interest and in some cases criminal charges. The CRA has access to a lot of information and under-reporting your income can lead to audits and financial consequences down the road. It’s always better to be honest and report all income no matter how small it may seem.
Myth 6: Tax professionals can help you not pay taxes
While tax professionals can certainly help you maximize your deductions and credits, there is a myth that they can help you not pay taxes at all. Tax evasion is illegal and no reputable tax professional will do that. A tax accountant’s role is to help you understand the tax laws and make sure you’re in compliance with them while minimizing your tax liability in a legal way. They can guide you through tax-deferral programs, deductions and credits but their goal is to optimize your tax situation, not help you not pay taxes at all.
Summary
Knowing the facts about taxes is important for every Canadian. By debunking these common tax myths, you can avoid costly mistakes and be in compliance with the law. Whether it’s understanding the difference between deductions and credits or reporting all income, having the right tax knowledge can make a big impact on your personal finances and long-term financial success.
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