IDC4U1
Tax Year 2014
for academic year 2014-2015
Personal Income Taxes for 2014 ( to be completed and paid by April 30, 2015)
Canadians use a self-assessment system of tax returns. This means each of us is responsible for
reporting on and paying our legally required income taxes each year. This is a similar system to the USA,
Great Britain and Australia, among many others.
We use the T1 General Form, and any other forms needed to complete our tax return. This will almost
certainly include a T4 and/or T5 slip that reports our employment income (T4) or investment income
(T5) such as interest, dividends, or capital gains. You will also use a Schedule 1 to calculate Federal tax
and an ON428 to calculate Ontario tax. You need to keep track of other receipts as well such as RSP
contributions, tuition paid for university, spending for children’s day care and so on.
Information about you (page 1 of T1 General) This is data collected each year from the taxpayer.
It helps determine which tax system you are under, by which province or territory you live in. Your
federal taxes are identical for all Canadians in each province, but provincial tax systems vary somewhat,
especially Quebec which has a very independent provincial tax system from all the other provinces. You
also identify your marital status, along with information for Elections Canada to help ensure you can
easily vote.
Total Income (page 2 of T1 General)
Gross Salary you earned is reported to you on your T4 slip. All your deductions, withheld legally by
your employer, and sent to government, are also noted on the T4. Follow the T1 General to partially
complete your tax return. The idea is to calculate all possible sources of income, less all allowable
deductions or credits, and note all money already sent to government, to see if you owe any further
income tax for that year or if the government owes you a refund of some of your payments.
The tax system is a “progressive tax system” meaning that the more you earn, the higher percent of that
extra income will be paid to government. The federal (central) government in Ottawa has one method
to calculate tax owing and Ontario has a slightly different way. The provincial tax payable is always less
than federal, so Ottawa always transfers large amounts to each province each year.
Dividends Received:
If you earn dividends from a Canadian corporation ( or a non-Canadian
corporation, thus paying more tax), you must calculate the taxable amount and add that to your Total
Income ( line 120). The governments ( both federal and provincial) require you to report a higher
“taxable amount “ of dividends than you actually received. This is called “grossing up” your actual
dividends, and the government requires this to be increased by 38% more than you received. Don’t
worry, the both governments give you a dividend tax credit that reduces the tax on dividends through
Schedule 1, line 41 (federal) and line 42 on ON428. Overall, you get a credit of 15.02% of the “grossed
up” dividends for federal taxes and 10% of the “grossed up “ for Ontario taxes.
Dividend Calculation example:
Assume your TAXABLE INCOME is $70 000 and you receive $1000 of eligible Canadian dividends ( you
are not required to know how to calculate tax on “non-eligible or non-Canadian dividends” for this
course).
You must “Gross-up” the dividend amount x 1.38 and add this to Taxable Income therefore, add $1380.
At a taxable income of $70 000, the extra $1380 now added to Taxable income would attract marginal
rates of 22% federally and 9.15% provincially. Initially this is 31.15% X $1380 which is $429.87 “owing”.
However, each level of government gives you a TAX CREDIT on your GROSSED UP amount. The federal
government gives a 15% credit on the $1380 and Ontario gives 10% on the $1380. These credits are
always the same percentage, no matter your income. Thus, you receive a credit of 25% on the grossed
up amount of $1380, so a credit of $345. Initially you owe $ 429.87, but you now have a credit of $345
so you actually owe $84.87
This person, with taxable income of $70 000 plus $1000 of eligible dividends pays an extra $84.87 for
those dividends, a mere 8.487% on $1000. If they had received a BONUS from work of $1000 with the
same $70 000 taxable income before, they would have had to pay $311.50!!!
SUMMARY DIVIDEND TAX CALCULATIONS
1. Add eligible dividends received to Taxable Income +1000 ( assume $70 000 taxable prior)
2. Gross up by 1.38X $1000
3. Marginal tax on $1308 is 22% Federal and 9.15% provincial
4. BUT, tax credit on $1380 is 15% federal and 10% provincial
5. Overall tax owing on $1380 is 31.15% less 25% = 6.15% on $1380 = $84.87
6. You received $1000 in dividends and paid $84.87 so your effective tax rate on eligible Canadian
dividends is 8.487 %. Not bad!!
Note that for very low income Ontarians, you pay no tax on dividends, since you receive the 15% + 10%
tax credits but pay 15% plus 5.06 % tax. Maximum tax rates are 29% plus 13% on grossed up dividends,
so the maximum payable is about 23.5% on the dividends received, even for the highest income
Ontarians. The government wants to encourage investing.
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Interest Received:
If you earn interest by saving in a bank or other institution, they will issue you a
T5 slip each year showing how much you earned, if it is over $50 in a year. ( It is thought that the
difficulty in keeping track of small interest payments isn’t worth the hassle for taxpayers, banks and
Ottawa). You show interest on the T1 General on Line 121 . It is taxed
Capital Gains:
This is the easiest additional income tax to calculate. You calculate the amount you
received when you disposed of ( sold) your asset. You subtract the cost to acquire the asset and any
extra costs to dispose of it ( like lawyers, brokers etc.). This is your capital gain, but, you only report 50%
of this gain as Taxable on Line 127. Thus, the highest tax on capital gains is 50% of (29% fed plus 13.16%
Ontario) which equals 21.08% on the capital gains received. Note: There are no Capital Gains taxes if
you sell your Principal Residence ( your home or condo that you own). There are capital gains if you sell
other real estate, shares, bonds, derivatives etc.
Net Income ( top of page 3 of T1 General)
Here, most Canadians have various deductions from Total Income, such as registered payments they
made to save for retirement (RPP’s on line 207) or RRSP payments on line 208, union dues line 212 or
child care expenses line 214
Taxable Income ( bottom of page 3 T1 General)
Not many Canadians can use these deductions or losses, and often your net income is the same as your
taxable income.
Refund or balance owing ( page 4 of T1 General)
Calculate federal tax using Schedule 1, and calculate provincial tax using ON428 , if you are resident in
Ontario.
You may do this on paper and mail it, use government –approved software which many private
companies sell or use Telefile from the government itself.