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  • Writer's pictureJosh Leyenhorst

Helpful Ways To Think About Your Personal Taxes

Updated: Feb 3, 2023

We are now into the new year and, for many people, the new year brings with it the desire to consider what the upcoming year will look like, and often personal finances play a significant role in that. One of the things you may look at is the various streaming services you subscribe to, and consider this in the context of the many alternatives out there that you can choose from. This becomes a question of value. For the money that you are paying, what kind of value are you receiving? This is an important question to ask regularly when it comes to your finances.

So, given that we do this for ongoing subscriptions we have, which in aggregate may amount to a few hundred dollars a year, maybe more, how much more important would it be to take stock of how much we are paying in taxes each year - which for a great many Canadian families is in the tens of thousands of dollars - and assess what kind of value we are receiving for that? Now, I recognize that this cannot be done in the same spirit of deciding whether or not we want to continue “paying for that service”, in the context of taxes, and there is a lot of value provided to citizens through the use of tax dollars that we are often not aware of. However, it is still striking how many people are simply unaware of how much tax they pay each year in total, despite the fact that taxes are the greatest expense each year for most Canadian families. With the tendency of government to continue increasing in size, and the incentive within many governmental departments to continue spending their full budgets whether it is necessary or not (an important topic for another time), the reasonable assumption is that our tax burden will continue increasing.

From my vantage point as a CPA, it seems the typical situation for many people is this. They receive a paycheque from their employer which has deductions taken off for taxes (we number-nerds refer to those as source deductions), and this net amount is the take-home pay that they anticipate, and which forms the basis for a monthly personal budget (for those of you who budget). Then, toward the end of the year, they speak with their accountant about the impact of donations, RRSP’s, etc., on how much tax they can hope to receive as a refund, or may potentially need to pay, and it is that final refund or payable amount that becomes the focus at tax time. And while it may be exciting to receive a few thousand dollars back in income taxes, after diligently having your tax return filed, it seems we have become conditioned to focus on that net amount at the end of the year, rather than the total amount of taxes paid. If we did not have source deductions withheld from our paycheques, and had to pay our tax bill at the end of each year in total, that amount would be much more top of mind for many people, given the significant amount that it would be (of course, deducting these amounts from each paycheque is an effective way to ensure everyone can and will pay their taxes, rather than expecting people to put that money aside in order to pay each year…because we know that would be a problem).

As someone who is acutely aware of the amount of taxes that flow to our government from individuals and businesses, I think it would be so important for people to know the total impact that taxes have on their lives, as I believe it would encourage people to plan more, and I believe it would result in a greater requirement for accountability from those who we elect to make decisions on how our tax dollars are used (or misused). I think there are two ways of looking at this that would be helpful:

1. Take the total amount of tax that you paid for the year, and divide it by 365. That is your estimated daily tax cost. If you paid $20,000 in taxes last year, that amounts to $54.79 per day. That helps put it into perspective a bit; particularly if you are trying to stay on budget more by perhaps eliminating that $5/day latte on your way to work. I would suggest adding other taxes that you can total with certainty as well; such as property taxes, and taxes from your recurring monthly bills. It is important to note that most of your taxes are variable, and change as a function of how much taxable income you have, or how much you spend, though some are more fixed, such as your property taxes. Just be aware of how these drivers would impact your estimated daily tax cost.

2. Whenever you hear the federal government talk about spending, think “$10 billion equals $265 for me, as one of the 37.8 million Canadians making up the population of Canada”. This is a rough approximation, as not all 37.8 million Canadians pay income tax, and a lot of tax is also paid by businesses, but it helps contextualize the large numbers often thrown around in government spending announcements, which may otherwise be easy to be disconnected from. So, if the government announces that it wants to spend $20 billion to study whether migrating geese smile when they fly over Tim Hortons locations (I made that up, it’s not a real thing…hopefully), you can ask yourself, “is that something that seems worth $530 of my tax dollars?”

Now that we can contextualize our taxes into more meaningful numbers for our day to day lives, here are 3 lines on your tax return that I would recommend you pay attention to for previous and future years, in addition to the final amount refundable/payable.

Line 15000 – Total Income

This is the sum of all your income. Many people have one job, and so will know what this is. However, for those of you who work multiple jobs or have multiple streams of income (such as rental property, investments, self-employment income, etc.), it can be helpful to know what this number is at the end of the year. This can also be an area to look at when it comes to tax planning.

Line 26000 – Taxable Income

This is the amount of income on which your taxes are calculated. This amount is equal to your total income, less various deductions arriving at net income, such as RRSP contributions, support payments, union dues etc., as well as some other deductions. Knowing this number lets you know the basis on which your taxes are calculated, and is also one of those areas to look at when it comes to tax planning.

Line 43500 – Total payable

This is the big tax number, which represents the total amount of income tax you have to pay (both federal and provincial). It is usually the difference between this amount and what has been withheld from your paycheques for the year that determines what your refund or amount payable is each year (with the exception of a few other adjustments). If I could request just one thing from this post, it is that you become familiar with what your total tax payable is, how it changes year over year, and why it might be changing year over year. Many accountants will be able to provide you with a 5-year comparison of your taxes, so that this can be easily compared.

One more thing worth noting. This post is primarily about personal income tax. In addition to this, you also pay taxes on a number of other things, such as property taxes, GST/HST and PST on purchases you make, fuel tax when you fill up your car, and the carbon tax to name a few. There are also taxes that employers have to pay, such as payroll tax or the Employer Health Tax in British Columbia, which may decrease the amount that they can pay employees. These further add to your effective tax burden, as they may result in a downstream increase in prices that you pay for goods and services as they are introduced or increased, further increasing the cost impact to you due to taxes. Sometimes the introduction of employer taxes can result in higher taxes elsewhere. A prime example is the Employer Health Tax introduced in British Columbia, which increased the cost of employment for cities and municipalities, and that resulted in higher property taxes.

So, as you look at the year ahead and consider your finances, let this be the year that you decide to become more aware of the taxes you pay, considering your total annual and your daily tax burden, what your personal rough tax contribution is to government spending announcements, and what additional value, if any, you may be receiving for your tax dollars, either directly or collectivistically through the impact of government spending on society.

Click here if you need help with your personal taxes.

I suppose since we’re talking finances and taxes I should mention that the information above is intended to be of a general nature, and is not intended to address the circumstances of any particular individual or entity, and is not able to capture changes that may be enacted that would impact the information above following the date of publication. As such, there is no guarantee that the information above is accurate as of any given date following publication, and so no one should act on or make specific decisions based on the information above without first receiving professional advice that can take into consideration specific circumstances for each person. Should you wish to discuss your specific situation, you can contact me here.

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