Grade by Grade
F. Financial Literacy · Money and Finances: Payments, Financial Plans, Budgets, Interest and Smart Spending

Income, Deductions and Taxes in a Financial Plan

F1.2 A1About 45 minutes
Learning goals
  • I can explain the difference between gross pay and net pay.
  • I can name common paycheque deductions and what taxes pay for.
  • I can include sales tax and income tax in a financial plan.
  • I can work backwards to find the most I can spend before tax.

Words to know

gross pay
Your pay before anything is taken off. Hours worked × hourly wage.
net pay
Your take-home pay after deductions. This is the money that actually reaches your bank account.
deduction
An amount taken off your pay, like income tax.
income tax
Tax on money you earn. It is paid to the federal and provincial governments.
HST
Harmonized Sales Tax: the 13% sales tax added to most purchases in Ontario.
tax return
A form people file each year to report their income. It works out whether they paid too much tax (and get a refund) or too little (and owe more).
TFSA
Tax-Free Savings Account. Interest and growth inside it are not taxed. You can open one once you are 18.

Your first paycheque

Leila is 16 in this example. She got a summer job at a garden centre: 25 hours a week at $18.00 an hour (an example wage; Ontario's minimum wage is set by law and changes over time). After her first week she expects 25 × 18 = $450.

But her pay deposit is only $405. Where did the other $45 go?

A garden centre worker in an apron waters rows of potted flowers and young trees on a summer day.
A summer job like Leila's at a garden centre pays an hourly wage. Hours times wage gives gross pay, but deductions are taken off before the money reaches the bank. AI-generated image

Gross pay and net pay

  • Gross pay is what you earn before anything comes off: hours × wage.
  • Net pay is what you take home after deductions.

Common deductions from a paycheque in Canada:

  • Income tax, which goes to the federal and provincial governments.
  • EI (Employment Insurance) premiums. EI can give people money for a while if they lose their job.
  • CPP (Canada Pension Plan) contributions, which help pay for a pension when people retire. These start once a worker turns 18.

The pay stub that comes with each paycheque lists each deduction.

Net pay = gross pay − deductions

So plan with your net pay, not your gross pay. That's the money you can actually use.

Net pay $405 (take-home)$45Gross pay: 25 h × $18.00 = $450Deductions (like income tax and EI)Plan with this part ↑
Leila's first week. Gross pay is the whole bar; deductions come off the end, and net pay is the part that reaches her account. Bar lengths are drawn to scale.

What taxes pay for

Taxes pay for public services we share: health care, public schools, roads and public transit, parks, libraries, and many more. Paying tax is how a community pays for things that would be hard for one person to buy alone.

Income tax in Canada uses tax brackets: the more you earn, the higher the rate on the higher part of your income. Each spring, people file a tax return (usually due April 30) to check whether the right amount was taken off. A student who earns only a little in a year may get some or all of their income tax back as a refund. That's one reason it can be worth filing, even with a small summer job.

Other tax implications for a plan:

  • Sales tax: in Ontario, 13% HST is added to most purchases. Some things, like basic groceries, have no HST.
  • Interest is income: interest earned in a regular savings account counts as income and can be taxed. Growth inside a TFSA (for people 18 and older) is not taxed.
  • RESP: families can save for a child's education after high school in a Registered Education Savings Plan, and the government adds grant money to what they save.

All wages, deduction amounts and tax rates in this lesson's questions are examples chosen to make the math clear. Real deductions depend on many things.

Worked example

Example 1: Leila's summer pay

Leila works 25 hours a week for 8 weeks at $18.00/h. Her example deductions are $45 a week. Find her gross and net pay for the summer.

  1. Weekly gross: 25 × 18.00 = $450.
  2. Weekly net: 450 − 45 = $405.
  3. Summer gross: 8 × 450 = $3 600. Summer net: 8 × 405 = $3 240.
  4. Deductions for the summer: 8 × 45 = $360. That's 360 ÷ 3 600 = 0.10, or 10% of her gross pay.

Gross $3 600, net $3 240. Her plan should use $3 240.

Worked example

Example 2: Building tax into a plan

Leila decides to save 60% of her net summer pay toward a used e-reader and a laptop for school. How much will she save? What is the most she can spend before 13% HST so that the total stays within her savings?

  1. Savings: 0.60 × 3 240 = $1 944.
  2. With tax, total = price × 1.13. She needs price × 1.13 ≤ 1 944.
  3. Work backwards: price = 1 944 ÷ 1.13 = 1 720.35...
  4. Check: 1 720.35 × 1.13 = 1 943.9955 ≈ 1 944.00 ✓

She saves $1 944 and can spend up to about $1 720 on price tags before tax. Dividing by 1.13 "undoes" the 13% HST.

Worked example

Example 3: Tax on interest

In this example, Leila's parent earns $80 in interest in a regular savings account and pays tax on it at an example rate of 25%. How much interest does the parent keep? How much if the money were in a TFSA?

  1. Tax: 25% of 80 = 0.25 × 80 = $20.
  2. Kept: 80 − 20 = $60.
  3. In a TFSA: the interest isn't taxed, so the parent keeps all $80.

$60 in a regular account, $80 in a TFSA. Over many years, tax-free growth can make a big difference in a long-term plan.

Don't subtract 13% to undo tax

If a total with tax is $113, the price before tax is $100 (113 ÷ 1.13), not 113 − 13% of 113 = $98.31. The tax was 13% of the price, not of the total, so you divide by 1.13.

Price$100.00Total with HST$113.00× 1.13 (add 13% HST)÷ 1.13 (undo the HST)Not this: $113 − 13% of $113 = $98.31 ✗(13% was of the price, not of the total)
Multiplying by 1.13 adds HST, so dividing by 1.13 undoes it exactly. Subtracting 13% of the total takes off too much.

Ask good questions

Money words can be confusing at first. Asking "What does this deduction pay for?" or "Why is my net pay lower?" is exactly what good problem solvers do. A trusted adult, a pay stub, or a reliable government website can help you find answers.

Just for fun

Your first paycheque is like ordering a large pizza. You ordered the whole thing (gross pay), but a few slices go to deductions before the box reaches you (net pay). The good news: those slices help pay for roads, schools and libraries.

Hands-on activity

Receipt and pay stub detective

You need: 3 or 4 store receipts, a calculator, and (optional) a sample pay stub from a grown-up with the personal information covered or cut off.

  1. On each receipt, find the subtotal, the HST and the total. Check: is the HST about 13% of the taxable items? Are any items untaxed (like basic groceries)?
  2. For one receipt, work backwards: total ÷ 1.13. Do you get the subtotal (for all-taxed receipts)?
  3. If you have a pay stub, find the gross pay, each deduction and the net pay. Check that gross − deductions = net.
  4. Talk about it: what public services in your community are paid for by taxes?

What to look for: tax amounts close to 13% of taxed items, and correct subtraction of deductions. Rounding can make a cent of difference.

Your turn

1

Find the gross pay for 15 hours at $18.00 an hour.

2

Gross pay is $270 and deductions are $18.90. What is the net pay?

3

A jacket costs $60 before tax. Find the HST and the total.

4

Why should a financial plan use net pay instead of gross pay?

5

A receipt total is $226.00, and all items had 13% HST. What was the price before tax?

6

Name two deductions that can come off a paycheque.

7

Name three things in your community that taxes help pay for.

More practice: warm-up

1

Find the gross pay for 10 hours at $18 an hour.

2

Gross pay is $500 and deductions are $40. What is the net pay?

3

What is the HST on a $200 purchase in Ontario?

4

Which reaches your bank account: gross pay or net pay?

5

What does HST stand for?

More practice: on your own

1

Marco works 6 hours every Saturday for 10 weeks at $17.50 an hour. What is his gross pay?

2

A 16-year-old's pay stub shows gross pay $640, income tax $32.00, EI $10.50, and no CPP. What is the net pay? Why is there no CPP?

3

You have $339 to spend, including 13% HST. What is the most expensive item (before tax) you can buy?

4

An account earns $80 of interest. In this example, interest is taxed at 25% in a regular account and not at all in a TFSA. How much more is kept in the TFSA?

5

Headphones cost $250 before tax. Sam saves $56.50 of his net pay each week. How many weeks until he can buy them?

Challenge

1

Jun works 30 hours a week for 9 weeks at $18.50/h. Example deductions are 6% of gross pay. He saves 80% of his net pay. How much does he save?

2

Emma wants a $1 500 (before tax) item. Her net pay is $300 a week and she saves two-thirds of it. How many full weeks must she work?

3

Job A pays $19/h for 20 h a week. Job B pays $17/h for 24 h a week, but bus fare is $3.30 each way, 5 days a week. Both have example deductions of 8%. Which job leaves more money each week, and by how much?

Check your understanding

Quiz

1.

Gross pay is $520 and deductions are $41.60. What is the net pay?

2.

Which is not a paycheque deduction in Canada?

3.

A total including 13% HST is $56.50. What was the price before tax?

4.

Why might a student with a small summer job file a tax return?

5.

Which account lets savings grow without being taxed (for people 18 and older)?

6.

Hours: 12. Wage: $18.25/h. What is the gross pay?

For parents and teachers

Big idea: F1.2 asks Grade 8 students to account for tax implications in a financial plan. Here students learn gross vs. net pay, common deductions (income tax, EI, CPP from age 18), what taxes pay for, HST at 13%, and that interest can be taxed (except in a TFSA). All wages and deduction amounts in the questions are simplified examples.

How to help at home:

  • If you're comfortable, show a pay stub with personal details hidden and find gross pay, deductions and net pay together.
  • Look at receipts together and find the HST.
  • If your child has a part-time job someday, help them file a tax return; it's a great real-world lesson.

Common difficulties:

  • Planning with gross pay. Remind them: "Plan with what reaches your account."
  • Undoing tax by subtracting 13%. To find the pre-tax price, divide by 1.13.
  • Thinking taxes are just "lost" money. Talk about the services taxes pay for in your community.