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Retirement Planning: Tax Planning

In Canada, each individual taxpayer pays tax on their worldwide income. This means that even if you earn investment income or pension income from another country, it must be reported on your Canadian tax return.

Some types of income have a certain amount of tax withheld at source, for example, your employment income from the Yukon government.

In retirement some tax will be withheld from your Public Service Superannuation Plan (PSSP) income.

Other types of income, such as interest, dividends, and possibly Canada Pension Plan (CPP) and Old Agre Security (OAS) payments, do not have tax withheld at source.

When you file your annual tax return, you must report all your income, as well as all the tax you have already paid through source deductions. If there's a shortfall, you’ll have to pay the balance. If you’ve overpaid, you'll get a refund. Good tax planning aims to put you in a break-even position. Although some people like to get a refund, it really just means that you’ve paid too much tax all through the year.

Some types of income are taxed more favourably than others.

For example, dividends from Canadian companies and capital gains are subject to favourable tax treatment for investments held outside of Registered Retirement Savings Plans (RRSPs).

Interest payments, employment income, and income from Registered Retirement Income Funds (RRIFs) and annuities, on the other hand, receives no special treatment.

The overall rate of tax that you pay depends on how much income you earn each year. We all pay a lower rate of tax on the first dollars we earn each year, but as our income increases, the tax rate increases too. The good news is that the higher rate of tax only applies to the dollars that fall into the higher tax bracket.

Following are the combined federal and Yukon personal income tax brackets that apply to Yukon residents for the year 2008:

Taxable Income

% Of Additional Income

$0 - $37,885

22.04%

$37,886 - $75,769

31.68%

$75,770 - $78,755

37.44%

$78,756 - $123,184

38.01%

Over $123,185

42.40%

 

Example:  if you earned $37,900 you would pay 22.04% tax on your earnings up to $37,885, and 31.68% on the amount earned over that level.

The tax calculator on the Ernst and Young website will automatically calculate the tax payable on your taxable income for any province or territory in Canada.