So, what do write-offs actually do for you….?
Again…Disclaimer, disclaimer!!! I AM NOT an accountant or bookkeeper. Everything listed below are practices I’ve found to be helpful in understanding and estimating my personal tax situation. If your situation is more complex, please, please, please connect with your accountant.
As an example, let’s say you earned a gross self-employed income of $40,000 this year. ‘Gross’ indicates the amount BEFORE taxes are deducted. In other words, you can’t keep the whole $40,000 – you’re going to owe the Canada Revenue Agency. We’ll also assume (for the sake of our example) that you spent none of your money on business related expenses. In order to uncover how much tax you’d need to pay, you can use the following website:
Ernst & Young’s Personal Income Tax Calculator – available for Canada & the United States. Simply input your gross earnings or estimated gross earnings (by using the link provided) into the cell related to the province you reside in: http://www.ey.com/ca/en/services/tax/tax-calculators-2016-personal-tax.
After inputting a gross income of $40,000, below are the taxes payable, organized by Province.
In our example, the tax owing (based on British Columbia) would be $5,842, resulting in a net income (money for you) in the amount of $34,158. An important point, (we’ll save it for another post), is how to ensure that you set aside the tax money owed to CRA.
Now, let’s assume that you spend $2,000 on business related expenses. You would now input $38,000 into the tax calculator, reducing the gross income by $2,000. You now owe $5,394 and have a net income of $32,606.
A common misconception is that write-offs are entirely recovered by tax savings. In our example, spending $2,000 on business expenses reduces taxation by $448. Keep in mind the tax savings will increase at higher income levels.
Hopefully, now you have a sense of what write-offs are and how they affect the amount you'll pay to the government in the form of Income Tax.