Wednesday, May 02, 2012

Fun with income tax forms

Somewhere in Alberta, Canada, I fill out my 2011 tax forms...

Even though I'm in the 22% Federal income tax bracket, and the provincial tax rate is 10%, it looks like I'll be paying only about 6% of my total income in taxes this year (plus about 5% for CPP/EI). How the heck is that possible, you ask? It's a shame that the tax forms are so hard to follow, because it's quite useful to know how they work.
  • [T1 Line 208] Well, I bought over $10,000 in RRSPs and those are deducted from my income right away, taking me near the bottom of the 22% tax bracket (and closer to the 15% bracket, which is the lowest tax bracket).
  • [Schedule 1 Line 1,7,9,12] Next, like everyone else I get to deduct the basic personal amount of $10,527, CPP and EI premiums (about $3000 for both) and an extra $1065 called the "Canada employment amount" which I apparently get to deduct simply because I have a job. Unlike the RRSPs which cut off the "top" of your income, these other deductions cut off the "bottom" of your income since they only count at 15%, not at 22% or whatever tax bracket you're in.
  • Notice that the basic personal amount is an odd beast: the government could have simply created a 0% tax bracket for the first $10,527, but that's not technically how it works. The lowest tax bracket is 15%, but the first  $10,527 is counted as a non-refundable tax credit. Since this number is added in with all the other tax credits, it makes your tax forms more difficult to follow, but as far as I can see, the end result is exactly the same as if a 0% tax bracket did exist (even if you are in one of the higher tax brackets).
  • [Schedule 1 Line 51] Federal political contributions of $400 or less are deducted at an incredible 75% rate! So if you're in the 15% bracket, it is as though the government does not tax your contribution at all and then pays 60% of the money back to you! I took advantage of this weird little-known rule to give the Pirate Party $400, which, depending on how you look at it, cost as little as $100. (You can give over $400, of course; contributions between $400 and $750 are deducted at 50%, and up to $1275 are deducted at 33%.)
  • [Schedule 1 Line 30 + Schedule 9] The real gravy train is in charitable donations. When you give more than $200 to charity, the federal government deducts everything over $200 at a rate of 29% (equivalent to the highest tax bracket)*. If you are squarely in the 22% bracket, that's as if the federal government is not merely deducting the donations, but actually paying you 7% of what you donate back to you. But in my case, being near the bottom of the 22% bracket, it is more like the FG is paying me about 10% back. (* the bottom $200 is deducted at only 15%.) I wonder how much tax the charities have to pay on donations...
  • But that's not all! You also have to pay provincial tax! But provincial taxes are much lower than federal taxes, at least here in Alberta. Alberta seems to have a flat tax of 10%, so the forms don't hurt your head as much. Albertans get to deduct a basic personal amount of $16,977 plus CPP and EI premiums (about $3000 for mine, just as before, for total deductions of about $20,000 at 10%). Note that RRSPs are deducted "in advance", since the provincial form calculates starting from the taxable income (total income minus RRSPs) instead of the total income.
  • [AB428 Line 27] So as I was saying about the gravy train... in Alberta your charitable donations above $200 are deducted at 21%, 11% above the 10% tax rate. So not only are your donations tax-deductable, but the provincial government pays 11% of your donation back to you!
  • To recap, in Alberta, charitable donations above $200 are deducted at a rate of 50%, independent of your income (21% provincial + 29% federal) even though the total tax rate is only 25% to 39% depending on your income. I donated $7400, so the total deduction is almost $3700 (not quite, since the deduction is only 25% on the first $200.)

    Great deal, huh? The only problem is, only registered Canadian charities get to take part in the gravy train. Some of my favorite charities such as the EFF and Avaaz are not registered Canadian charities (Avaaz says it cannot be a registered charity because it is politically active; EFF is not a registered Canadian charity because it's a US charity). Just don't go overboard with donations, because they are non-refundable: you can't take your tax rate below 0%.
Tip for anyone using StudioTax: yes, the UI is very confusing. If you can't find one of the forms on the list of forms on the left side, click the "Forms" button on the toolbar. This will open a dialog that contains a list of dozens of hidden forms. Find the one you want to see from the top area, select it, then click the button that has a downward-arrow on it, and finally click OK.


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