The objective of focusing on finances is to responsibly manage and grow my finances. Similar to Health, I think prioritizing Finances is foundational -- the reality is that the world runs on money, so, carefully managing my finances carefully provides me with the resources needed to live. I define Finance as consisting of Income (i.e. your salary), Taxes (i.e. the government's portion), Expenses (i.e. what you spend your money on), Savings (i.e. what you put away), Debt (i.e. what you borrow), and Investing (i.e. growing your money).
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All residents of Canada have to pay Federal and Provincial income tax. The amount of income tax owed is based on several factors including your tax residency, tax bracket, deductions, etc.
Your tax residency is generally based on your location. This can get a bit more complicated if your time is split across several locations but generally it's based on where your primary residence is, where your family / spouse is, how much time you spend in each location, etc.
Canada uses a progressive tax system where you pay a stated rate for income that falls in each tax bracket. Tax rates gets progressively higher as the amounts increase. It can be complicated to calculate how much you're paying so I typically rely on an income tax calculator to help me better understand my Average Tax Rate (i.e. your blended rate) along with Marginal Tax Rate (i.e. rate for each incremental dollar earned). There are Federal and Provincial tax rates.
As of 2022 the Federal income tax brackets were:
| Federal Tax Bracket | Rate |
|---|---|
| $50,197 or less | 15% |
| $50,197 to $100,392 | 20.5% |
| $100,392 to $155,625 | 26% |
| $155,625 to $221,708 | 29% |
| More than $221,708 | 33% |
The latest federal tax rates are available here: https://www.canada.ca/en/financial-consumer-agency/services/financial-toolkit/taxes/taxes-2/5.html
Provincial tax depends on which province you're a tax resident of. Ontario, Alberta, Nunavut and Northwest Territories have the lowest rates maxing out around ~15% where as Quebec has the highest with a rate of 25.75%.
I currently reside in British Columbia which has the following rates:
| B.C. Tax Bracket | Rate |
|---|---|
| On the first $43,070 of taxable income | 5.06% |
| On the next $43,071 | 7.7% |
| On the next $12,760 | 10.5% |
| On the next $21,193 | 12.29% |
| On the next $42,738 | 14.7% |
| On the next $64,259 | 16.8% |
| On the amount over $227,090 | 20.5% |
The full list of provincial rates are available here: https://www.canada.ca/en/financial-consumer-agency/services/financial-toolkit/taxes/taxes-2/6.html
In British Columbia, the lowest marginal tax rate is 20.06% (15% federal + 5.06% provincial) while the highest marginal tax rate is 53.5% (33% federal + 20.5% provincial).
CPP provides retirement income for those that are retired. All workers in Canada pay into CPP. The maximum yearly CPP contributions for an employee as of 2023 is C$3,754.45.
The latest CPP rates are available here: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/canada-pension-plan-cpp/cpp-contribution-rates-maximums-exemptions.html
EI provides income support for people who are currently not working (due to layoffs, etc.). All workers in Canada pay into EI. The maximum yearly deduction for EI for an employee as of 2023 is C$1,002.45.
The latest EI rates are available here: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/employment-insurance-ei/ei-premium-rates-maximums.html
There are several different registered accounts in Canada including RRSP, TFSA, HPB, etc.
A TFSA is an account that allows tax sheltered growth on the assets in the account. There is no income tax paid when you withdraw an asset that has grown inside of a TFSA account.
Each year, you're allowed to deposit up to a certain amount into your TFSA. The TFSA contribution limit in 2023 is C$6,500. Unused TFSA contribution room accumulates and rolls over each year, meaning if you've never utilized your TFSA since it was introduced in 2009, your total contribution limit across all years will be C$88,000.
It's important to understand how contributions and withdrawls work for your TFSA. Read more about it here https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributions.html
US Dollar TFSA
Some Canadian banks offer TFSA accounts in US dollar denominations, for example a USD trading account that allows you to hold US stocks. For these accounts, the equivalent Canadian dollar value is used for reporting purposes.
TFSA Withdrawals
Withdrawals from a TFSA can be recontributed in the following year plus the additional contribution room in the following year.
TFSA Gains
Gains within a TFSA are non taxable.
TFSA Losses
Losses within a TFSA cannot be used as a capital loss to reduce taxable income. When evaluating whether to sell off an asset in a TFSA at a loss, you should only consider the recouped proceeds from the sale rather than trying to reduce your taxable income.
A RRSP is a tax vehicle that allows you to defer taxes on income to a future date. The general idea is when your earnings are high, you should contribute to your RRSP to lower your taxable income. In a future period for instance when you're retired, your earnings will be lower and you can withdraw from your RRSP and pay income taxes on those withdrawals at a lower tax rate.
The RRSP deduction limit in 2023 is the lower of C$$30,780 or 18% of your income. Unused RRSP amounts roll over to the next year.
The latest RRSP deductions limits are available here: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/contributing-a-rrsp-prpp/contributions-affect-your-rrsp-prpp-deduction-limit.html
When considering how much to contribute to your RRSP, you can ask yourself the following questions:
- Do I have available funds to contribute to my RRSP?
- Based off my current taxable income and contributions made this year, will I have income taxes owed? If yes, contributing to my RRSP can lower my taxable income and put me in a position to receive a tax refund rather than owing taxes.
- What are my expected earnings next year? If you expect higher income next year, you can roll over your RRSP deductions to be used to reduce your taxable income next year.
RRSP Withdrawals
Withdrawls from RRSP accounts can happen at any time, however, your financial institution will withhold taxes.
10% (5% in Quebec) on amounts up to $5,000
20% (10% in Quebec) on amounts over $5,000 up to including $15,000
30% (15% in Quebec) on amounts over $15,000
More reading available here: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/making-withdrawals/tax-rates-on-withdrawals.html
Canada doesn't have an inheritance tax, however, any outstanding taxes such as capital gains need to be settled before inheritance. More reading available here (1, 2)
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Whenever you submit an application to borrow money (credit card, mortgage, car financing, line of credit, buy now pay later, etc.), a credit check is run to determine whether or not you're approved for the loan and at which interest rate your loan will be. Your credit score is used as a measure of your trust-worthiness to pay your bills.
In Canada, there are two major credit reporting agencies: TransUnion and Equifax. Each of these credit reporting agencies have different methodologies for calculating your credit score but generally they take inputs such as if you pay your bills on time, if you have any unpaid bills in collections, how much available credit you have, and how much of the available credit you've already utilized. Credit scores generally take the last 6 years of history into account.
Canadian credit scores are scored between 300 - 900. Here are ranges used by Equifax.
| Credit Score | Category |
|---|---|
| 300 - 559 | Poor |
| 560 - 659 | Fair |
| 660 - 724 | Good |
| 725 - 759 | Very Good |
| 760 - 900 | Excellent |
There are a few ways to view your credit score:
1. Through your bank or credit card company's free credit monitoring features. These reports are provided for free in hopes that you'll buy other credit-based products in the future.
2. Through affiliate services such as Borrowell or Credit Karma. These reports are provided for free in hopes that you'll sign up for a credit card or loan through their affiliate links.
3. Directly through the credit reporting agency such as TransUnion or Equifax. These reports are also provided for free. Equifax's free report can be accessed here and TransUnion's free report can be accessed here.
In the US, the same credit reporting agencies of TransUnion and Equifax are used based off of a 300 - 850 score range. I haven't spent much time looking into US credit scores so I don't have many details to add here.
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There are several different assets which can be invested, here are some of thetm:
There are several different strategies when it comes to investing, here are some of them:
Buying real estate is likely the largest financial transaction a person will make.
When it comes to calculating what you can afford, a best practice is to stick with is the 30 / 30 / 3 rule:
- Rule 1: Keep your monthly mortgage payment below 30% of your gross income. For example, if your combined household gross income is $150,000 per year, your monthly gross income is $12,500 per month and 30% of that is $3,750. You should aim to keep your monthly mortgage payment below $3,750.
- Rule 2: Have a 30% down payment. For example, if the home you are looking to purchase is $500,000, you should aim to save $150,000.
An alternative interpretation of this rule is to instead have a 20% down payment ($100,000) and 10% saved for home maintenance ($50,000).
- Rule 3: Keep the home price below 3x your gross income. if your combined household gross income is $150,000 per year, multiplying it by 3x gives you a purchase price of $450,000. Note that unless you have a very high income, this rule has become nearly impossible to achieve with the rising cost of housing in most major cities.
When it comes to how much a bank is willing to lend you, if you have good credit, a general rule of thumb is 4x to 4.5x your annual gross income. For example, if your combined household gross income is $150,000 per year, multiplying it by 4.5x gives you max mortgage loan of $675,000. Note that just because the bank is willing to lend it to you, it doesn't make it a sound financial decision. I'd instead recommend sticking closer to the guidelines mentioned above.
High Net Worth Mortgages
A high net worth mortgage is a special type of mortgage that is based on an individual's assets rather than income. The requirements vary by lender requiring a 20% - 35% down payment plus an additional minimum of C$250,000 to C$500,000 in liquid assets. The mortgage loan amounts are typically matched 1:1, meaning the bank will lend you C$1 for every C$1 in liquid assets you have.
To calculate your mortgage payments, you will need the following information:
- Asking Price: The total price of the property.
- Down Payment %: The percentage of the asking price paid as a down payment.
- Amoritization Period: The number of years over which the mortgage will be paid off.
- Interest Rate: The annual interest rate for the mortgage.
The formula in Google Sheets / Excel is =PMT(interest_rate/12, amortization_period*12, asking_price*(1-down_payment_percentage))
Note that in Canada, all fixed rate mortages are compounded semi-annually by law. The formula for a semi-annual compounded rate is =PMT(1+ interest_rate/2^(1/6) - 1, amortization_period*12, asking_price*(1-down_payment_percentage))
Once you're ready to submit a mortgage application or pre-approval application, the lender will typically ask you for the following information to confirm your income, assets, and liabilities:
The First Time Home Buyer incentive is a shared-equity mortgage program offered by the Government of Canada. In short, the government will lend you 5% - 10% of the property price depending on the property type at a 0% interest in return for an equivalent ownership % until the loan is repaid. The government shares in both the appreciation and depreciation of the property value capped at an 8% per year gain or 8% per year loss (non-compounded) and the loan needs to be repaid in 25 years or upon the sale of the property. To qualify for this program, you need a household income under C$120,000 - C$150,000 depending on the property location and the total mortgage amount needs to be less than 4.5 times your gross income.
Here are a few examples of how this loan works. Say you buy a home for C$500,000 and the government provides you with a 5% loan of C$25,000. In ten years, you sell the home in the following scenarios:
My overall take on this program is that it helps de-risk property ownership by allowing you to take on a smaller mortgage but at the cost of reduced upside (and downside) in the property value. For more information on this program, read this Nerd Wallet article.
In Canada, realtor commission fees typically range from 5% - 7% depending on the province. This commission is split between the selling agent and buying agent.
If you're looking to save on commissions when selling a property, you can use a discount realtor (i.e. one percent) or go the for sale by owner route.
If you plan on doing a lot of real estate transactions, it might be worth getting your own real estate license. This isn't recommended if you're only doing a single transaction, however, if you'll be doing more than one a year, it could be worth it. The process for getting a real estate license varies depending on location.
Here are the steps and costs for getting a real estate license in British Columbia, Canada:
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