Tax Myths #1

The personal tax filing deadline is fast approaching, and I thought I’d take the next few weeks to dispel a couple of the most common tax myths that have formed over the years.

In the first of this three-part column, I am going to look at two common myths that I hear on a regular basis.

Often the most frustrating myth I hear repeated is over people’s fear of being “bumped into the next tax bracket”. Many people fear earning too much income because they feel it will push them into a higher tax bracket and they mistakenly think that this means they will pay this higher tax rate on their entire income.

All the money you earn below the new tax bracket remains taxed at the lower rates. It is only the amount over the threshold that is taxed at the higher rate. For 2018, there are five federal tax brackets:

* Up to $46,605 = 15 per cent
* $46,606-93,208 = 20.5 per cent
* $93,209-144,489 = 26 per cent
* $144,490-205,842 = 29 per cent
* $205,843 and up = 33 per cent

Let’s assume that you earn $95,000 of net income in 2018. You would not pay 26 per cent on your entire income but instead that 26 per cent tax rate would only apply to the last $1,792 you earned. So, don’t go refusing that pay raise or bonus this year (yes, people actually do this for fear of the dreaded “bump up” in tax brackets)!

The one big catch to the above statement is that in certain situations, you may lose out on government pension or other benefits if your income is above a certain point. As always, it is best to consult with a financial professional to maximize the tax efficiency of your financial plan.

The second myth I wanted to dispel today relates to the rules surrounding the RRSP Home Buyer’s Plan (HBP). Many people feel that the HBP is for first-time home buyers only and that if you or your spouse have ever owned a home before, you cannot qualify.

While Ottawa does state that the plan is intended for first-time buyers, you need to look at how they define these people. The rules state that you will be considered a first-time buyer (and therefore qualify for the plan) if neither you or your spouse or common law partner has owned a home that you used as a principal residence in the last five calendar years.

If your last ownership was outside of the five-year window, you may be able to qualify again. There is also the possibility that one partner qualifies even if the other does not. In addition, CRA adds exceptions to the HBP qualification rules when purchasing a home if you or the person you are assisting is disabled.

These days, it is very difficult to save up enough for a down payment on a home and the HBP may be a great resource to help achieve that dream. Before simply assuming you can’t qualify, make sure to read up on the rules which just might surprise you.

The above examples are just two of the many tax myths floating around. Canada’s tax rules are complex and ever changing and it is probably time to stop getting tax advice from your family and friends.

Seek out the guidance of a financial professional who can make sure your financial plans are as tax efficient as possible. Watch for next week’s column where I will continue with part two of my common tax myths feature.