Canada - Income Tax - Non-refundable tax credits

[scrubbyfish]

I've been drafting this question over and over for almost an hour. Every time I do, I find more answers! Okay. Here's what's left:

Non-refundable tax credits
Everyone starts with $11,038
Mine total $39,654
After the tax return math (this line x 15%), I have credits of $5948.10

Does it work this way:
Say I have income (work, investment returns, etc) of $40,000
I would normally owe [40000 x 15%=] $6000.
But once the credit is applied, the amount owing is reduced to [$6000-$5948.10=] $51.90, is that right?

What am I missing?
i.e., If the actual tax credit is only 15% of the "credit", why is CRA not just calling the basic personal amount credit [11,038x15%=] $1655.70?

[Al1961]

Because?


Seriously, there probably isn't a better answer than that. There are other possible tax credit amounts, and they all get added together before you apply the 15% credit rate, so treating the basic personal credit the same does make sense.

Al

[Goldielocks]

Okay,  barring a better response from an actual CPA... my two cents from memory.
You are mostly correct, but that is because your income is close to the first graduated tax amount.  (under $55k before the basic personal amount of $11k)

Step 1 -- calculate your Taxable income

The basic exemption is actually part of the graduated tax schedule.
e.g.,  first $11k (or what ever you have) is 0% tax

To make it complicated, because that is what ccra does....
This is subtracted from your gross taxable income, just like rrsp contributions, to reduce your income. 
Thus your (gross income - $11k- rrsp and other income tax deductions) = taxable income...  (a lower amount).


Step 2 -- Calculate your Taxes

Your taxes owed are calculated next:  example using the following graduated rates for BC

First $11k -- no taxes, basic personal amount
Next 37,800k  to $44k (e.g., over your basic deductions) is taxed at 20.06% **  (** so note, this would be earning $48k to $55k of gross income for a single person, no extra deductions)
Next $30k of income  (e.g., money over $85k gross) over that is taxed at 22.6% **
Etc,
Etc. until if you are making over $151k + $11k (or your original basic allowances) > $162k...  the amounts over $162k gross income is taxed at an astounding 45.8%  **


** These rates are the combined federal + BC income tax rates for 2014 **



Step 3 -- Subtract your Tax Credits --

Once your TAXES are calculated, you get to subtract your tax credits, which are usually only allowed at 15% or so REGARDLESS of your marginal tax rate and income...

These include medical tax credits, kid activity credits, donations, etc.
This ensures that everyone is receiving the same % back of the actual expense for these things, so the mid / lower incomes get a better credit, and the high earners get a smaller amount (as a percentage) of their taxes back.

 
In your example,  if you made $40k gross last year"

Step 1 -- Taxable income
$40k - $11k (basic personal amount, does not include kid amount or rrsp) = $29k 

Step 2 - Taxes
This $29k is entirely taxed at 20.06%, as it is less than $44k = $5817 

Step 3 - Subtract tax credits
$5817 - $5948 = no taxes owing.


Things like gross income, taxable income, and total tax credits (before the 15% factor is applied) will qualify you (or not) for other gov't money programs, so there are other reasons the taxes work like this, too.   But it is pretty messed up for the rest of us non accountants..  at least it is still simplier than US taxes for anything that is more than their  "easy" form.

[scrubbyfish]

Thank you, Al1961 and goldielocks!

goldielocks: Thanks for those details. I had sworn there was an initial amount not taxed, but was not locating that today (first time in years that I've looked) in charts of graduated tax amounts. And, because I had always believed (apparently correctly), that the basic personal amount is taxed at 0%, I had assumed that this was so for all non-refundable tax credits. From this discussion, I'm understanding that the former is correct, and the latter is incorrect.

There are other possible tax credit amounts, and they all get added together before you apply the 15% credit rate, so treating the basic personal credit the same does make sense.

I didn't word my question well. So, I didn't mean, "Why is the basic personal credit treated the same as other non-refundable tax credits?", but rather, "If the tax credits are 15% of a pre-determined number, is there a reason CRA isn't just stating the resulting number in the first place? Are there nuances to the non-refundable tax credit system that makes the 15% calculation step more relevant than just application of the resulting number?" (Is that clearer?)

i.e., The basic personal amount for everyone (regardless of income, etc) is $11,038, which is taxed at 0%. The tax credit is 15% of this, so $1655.70. The disability tax credit is stated to be $7697, but there seems to be no such actual credit in this amount, but rather a credit of 15% of it, or $1154.55.

So why is CRA not just saying, "$0-$11,038 is taxed at 0%. Also, everyone gets a tax credit of $1655.70, and if you're eligible for the DTC, you also get a credit of $1154.55." What does an approach of "15% of this pre-determined number" resolve over just the real number in the first place?

[Goldielocks]

Good luck getting a decent answer to that one!  If you do,  check out the WITB tax credit calcuation. 

I looked into it a bit the other day, and my mind is still spinning about how it really works, and I decided to stop trying.    The article I read was in support of beefing up this credit / money over increasing minimum wage for students and such, because it is the people on their own, not 17 and living with mom and dad, that really need the minimum wage help, according to the article, anyway.

WITB basically gives a graduated (declining %) credit back to people with family incomes between the $11k and $22k....  It helps minimum wage earners who are not living as part of a larger income family unit. 

[Al1961]

So why is CRA not just saying, "$0-$11,038 is taxed at 0%. Also, everyone gets a tax credit of $1655.70, and if you're eligible for the DTC, you also get a credit of $1154.55." What does an approach of "15% of this pre-determined number" resolve over just the real number in the first place?

Take a look at Schedule 1 to the T1 general income tax return. There are something like 2 dozen separate items that individuals may receive a 15% tax credit for: the basic personal amount, CPP and EI contributions, medical expenses, employment credits, and on and on.... Many of these are quite variable.

While the effect of the basic exemption is that the first $X is not taxed, it is just one of many possible tax credits, and does not deserve separate treatment. By adding them all together and then multiplying by 15% you treat them all the same, and make the tax forms just slightly simpler. After all, these credits also apply to individuals who are in higher tax brackets too.

I am an actual CA [Alberta doesn't use the CPA designation until the Legislature passes changes to our enabling legislation], but it's been about 18 years since I stopped doing corporate and personal taxes other than my own.

[scrubbyfish]

goldielocks: oh, I don't dare look at the WITB calculation, lol!

Al: Yeah, I do understand that there are lots of credits, and varying incomes and expenditures across households, etc. Applying a % to varying numbers makes perfect sense to me. Applying a % to an already predetermined number, rather than just stating the resulting number, doesn't, and seems unnecessarily convoluted and confusing. (That is, I for one have been living under a resulting misunderstanding re: the DTC, which has directly impacted my financial planning.)

However, I think we've reached consensus here that I'm not, in fact, "missing" some nuance of the math itself, which was my primary concern. Also, your reference to Schedule 1, and your noting that all items on this list are calculated together at 15% makes me think that CRA may just be reasoning along the lines of, "Mathematically, some of the credits are approached in a convoluted way, but when we put them all on one page like this, with one percentage applied, people feel they've got equal crack at credits and that makes the citizens happy."

[scrubbyfish]

I can't locate a chart that says the first $11038 is not subject to tax. Is this reflected only in Schedule 1, then?

i.e., The first $43,953 is actually subject to 15%, but then Schedule 1 allows us to create a tax credit in the exact amount of the tax. $11,038 x 15% = $1655
$1655 would normally have been due on that $11038, but is eliminated through Schedule 1.
Yes?

So, my tax credits will go...
$11038 for me
$11038 for kid (re: no spouse)
$4274 for kid born after 1996 who I take care of
$1117 Canada employment amount
$7697 disability tax credit me
$7697 disability tax credit kid
TOTAL: $42881 (plus medical receipts, child fitness or art receipts, etc)

Generally, the total numerical value of tax credits is not one and the same as the amount of tax "credit". In my case, though, it essentially works out that way only because the tax credits happen to total the full amount of the first tax rate. Is that right? i.e.,
Income of $42881 would normally result in a tax of $6429.
But tax credits totalling $42881 reduce taxes due by $6429
so the net due is $0.

So...
Income, employment +
Income, disability payments +
Income, interest and other investment +
Income, "other" +
Minus "carrying charges and interest expenses"
=$10,362 in taxable income

So, normally I would end up paying 10362 x 15% = $1554 in taxes.
But now we apply the calculated tax credit here... $1554 minus tax credits of $6429 = $0

All correct so far?

So, does that mean that, ultimately, I personally pay 0% tax on the first $42,750 of taxable income?
Because $42,750 is taxed at 15%, which equals $6412.50
I have tax credits of $6429.
So, up to $42,750 of taxable income in my case ends up with no tax?

[Goldielocks]

Not sure about all of it, but I believe you can claim the kid as spouse amount, or as kid amount, not both.

What are the situations in which you cannot claim the amount for an eligible dependant?
Even if all of the conditions have been met to claim the amount for an eligible dependant (read Can you claim the amount for an eligible dependant?), you cannot claim this amount if any of the following applies:

You or someone else is claiming a spouse or common-law partner amount (line 303) for this dependant.


I am also unsure about the Canada employment amount -- do you need qualified expenses to claim this one?   A lot of normal expenses can not be claimed, like work clothes, though I think uniforms and computers that are required by your employer for you to supply are allowed.  (if the expense was optional,ie.,  not a mandatory condition of employment, it is not usually allowed and employment expense).,   Also this credit can not be claimed for self employment, as should be a business expense instead, not a tax credit...


Finally, don't forget that this the gross amount of the tax credits -- that nice old 15% applies to the total.
 (or whatever formula works for that credit amount)

Generally, the total numerical value of tax credits is not one and the same as the amount of tax "credit" -- correct, these are usually very, very different, not only because of the tax brackets, but also because most people have far fewer credits.  It is not common that one's credits equals one's income, without very high medical or donations as a % of income.

Income of $42881 would normally result in a tax of $6429.
But tax credits totalling $42881 reduce taxes due by $6429...

Other than the fact that you have missed the BC taxes portion (which brings the federal 15% to a combined 20.06% with a slightly different tax bracket cut off) you are correct.
As well, this means that you could make up to $42881 (actually minus the canada employement credit and kid amount, I think),  and pay no tax.

Your govt monies (UCB, child bonus, etc) also start to decrease after you get to a certain amount.

WITB credit applies when your family income is under about $20k (more for larger families), and applies to employment income, which would raise the amount you could earn tax free.--- but your disability tax credits is greater than this, just good to know if you did not have them.


Net income level where the recipient is not eligible to receive the working income tax benefit (WITB)
2014 tax year
Single with children-- $28,316  (BC)

It declines from about $11k to the $28k, but is still valuable, if you have earned income.

Income includes UCB payments and other govt money... plus interest, dividend (at a preferred tax rate), withdrawls from RRSPs, etc.

[scrubbyfish]

Thanks, goldielocks!

Those are the lines and amounts my accountant filled in for my 2013 Schedule 1, so hopefully they are correct for my case.

I had never heard of the Canada Employment Amount, but the accountant had entered it on my Schedule 1, so I included it here. Upon reading up on it, it does appear to apply to me. It seems to be not about actual, specific, receipted expenditures but rather "provides recognition for work-related expenses such as home computers, uniforms and supplies in the public and private sector", and gives the example of a restaurant cook. (Yes, not available for self-employed.) i.e., I think CRA is just acknowledging that it costs money to have a job, thus provides this credit to anyone working for a third party. http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/363-eng.html

Hmmmm... I'm learning a LOT!

[Goldielocks]

Great!  Always best to rely on your accountant first and foremost.

[scrubbyfish]

Note that you are only entitled to the full basic personal amount if you were a resident of Canada for the entire calendar year (within the meaning of the Income Tax Act). If you were a nonresident for a portion of the year, you have to multiply the basic personal amount by the percentage of days in the calendar year in which you were a resident of Canada. This multiplication also applies to some other credits as well.

So in the case of, say, disability tax credit, it would still be the same starting number ($7697), and then different percentage calculations applied to that. 15% if you're around all year, but less if you're around less of the year. So, while the number $7697 is still the starting point, what happens after that is actually variable, depending on circumstances. i.e., Although the 15% (resulting in a credit of $1655.70) will apply to most people eligible for the DTC, the final number will be different for those resident fewer days. Is that what you're saying? If I'm understanding this correctly, that's a great reason for what otherwise seems unnecessarily convoluted. And you're right, they don't say any of this on the form, and expressly order us to calculate at 15% (which is what started my q in the first place).