Income Tax brackets in Canada: Explained

Delving into Canada’s income tax brackets might initially seem as challenging as a game of hockey against the pros—full of strategic moves and unexpected plays.

Yet, fear not! This guide aims to be your all-star coach, breaking down the complex tax system into manageable zones.

Whether you’re a rookie to the Canadian tax scene or looking to refine your financial strategy, understanding these tax brackets is key to playing the game wisely.

Let’s dive in!

What Are Tax Brackets?

Tax brackets determine the rate of income tax people pay according to Canada’s graduated tax system. 

Generally, those with higher incomes fall into a higher tax bracket, so they pay a higher tax rate than those with lower incomes, who fall into lower tax brackets.

How Tax Brackets Work In Canada

Each tax bracket has a corresponding rate of taxation. That rate is applied to the portion of your income that falls within the bracket.

For example, an income of $60,000 reaches the second federal tax bracket. 

If you make $60,000 this year, you’ll pay $15% tax on the first $50,197 of income and 20.5% on the remaining $9,803.

Federal income tax is just one part of your total tax bill. There are also provincial and territorial tax brackets to factor in in Canada. 

Provinces and territories each have graduated tax brackets, income limits and tax rates that differ from one another and the federal rate.

This means that if you and a friend both make the same amount of money, but you live in Ontario and they live in British Columbia, your overall tax rates — federal plus provincial — may be different.

Determine Your Tax Bracket

As you’ve seen, your tax bracket depends on your taxable income and where you live in Canada. 

To determine which federal and provincial tax brackets you are in, you’ll need to know your total taxable income and current federal and provincial/territorial tax rates.

If you’re a full-time employee and need to figure out your exact annual income, your pay stub may help.

Each stub shows your gross and net pay for the current pay period and year-to-date totals. The total year-to-date pay on your final pay stub can help you estimate your tax bracket.

Before the tax season, your employer will also give you a T4 slip summarising your annual earnings and tax deductions.

If you’re self-employed or freelancing and don’t get a traditional pay stub, you’ll need to keep close tabs on your gross income to determine which tax bracket it likely puts you in. 

Since your employers won’t be deducting taxes from your income, it will help if you can set this money aside yourself.

By March, you should receive a T4A slip from the CRA, which you can use to tally your income and various contributions for the year.

How Do You Identify Your Tax Bracket (s)?

Your tax bracket is based on “taxable income,” which is your gross income from all sources minus any tax deductions you may qualify for. 

In other words, it’s your net income after you’ve claimed all your eligible deductions.

Once you know your taxable income, you’ll apply the relevant federal and provincial/territorial rates to it. 

Your tax rate will vary by how much income you declare at the end of the year on your T1 General Income Tax Return and where you live in Canada.

Significantly, your provincial or territorial rate is determined by the province/territory you live in on December 31 of the tax year. 

So, if you move from Ontario to Nova Scotia, as long as you live in Nova Scotia on December 31, you will fall under the Nova Scotia provincial tax rates.

It would help if you calculated your federal income tax first and your provincial or territorial rate second. 

Add the two together, and, bam, you’ve got your “marginal tax rate,” the combined federal and provincial/territorial income taxes you pay on all sources of income at tax time.

How To Do A Tax Calculation: An Example?

For our example, let’s use Naveen in British Columbia. Naveen has been contributing to a Wealthsimple RRSP to reduce his taxable income (way to go, Naveen!). 

After his RRSP contribution and other tax deductions and tax credits, he has a taxable income of $60,000. Here’s how he would figure out his taxes:

Calculating the federal tax bill Based on the updated 2023 federal tax rates (see that section above), the first $53,359 of his income is taxed at 15%, which works out to $8,003.85

Taking his total income ($60,000) and subtracting the first income tax bracket ($53,359), he has $6,641 remaining unaccounted-for income. 

That amount will be taxed at a higher rate of 20.5%, which is $1,361.41. This means the total he owes in federal tax is $8,003.85 + $1,361.41, so $9,365.26.

Calculating the provincial tax bill Remember, Naveen’s provincial rate is based on his province of residence as of December 31

Since Naveen lives in British Columbia (see the chart above for your province or territory’s rates), Naveen’s first $45,654 income will be taxed at 5.06%, which equals $2,310.09

The remaining $14,346 of his income (found by taking his $60,000 total income minus the $45,654 he already calculated taxes on) will be taxed at 7.7%, which equals $1,104.64.

So, to find his total provincial tax, he adds $2,310.09 + $1,104.64 to get $3,414.73.

Calculating the total tax bill, Naveen’s combined federal and provincial taxes are $9,365.26 + $3,414.73, which adds up to $12,779.99. What a deal for being a law-abiding citizen!

What Are Tax Credits And Tax Deductions?

Tax credits and tax deductions can reduce either your income or the amount of tax you owe. 

Learn the difference below.

Tax credits

Both federal and territorial/provincial tax credits exist, and you’ll be glad to hear they help you pay less tax. There are two types: nonrefundable and refundable.

Nonrefundable tax credits

A nonrefundable tax credit reduces the amount of money you owe

To claim a nonrefundable tax credit, you must owe taxes — in other words, you must have earned enough income to owe income tax. 

Nonrefundable tax credits can reduce your tax owing to zero, but you do not receive a refund for any surplus amount if you have more tax credits than tax owing. 

For example, if you owe $2,500 in taxes and have nonrefundable tax credits for $2,700, your taxes will be reduced to zero (sweet!), but you will not receive the extra $200 (oh well).

Some nonrefundable tax credits include:

  • Personal exemption amount (anyone who owes tax is entitled to claim this exemption)
  • Credit for taxpayers over age 65
  • Credit for taxpayers with children
  • Credit for people receiving a pension
  • Credit for people with a certified disability
  • Credit for people who are caregivers to someone with a disability

Some other nonrefundable tax credits include tuition, medical expenses, Employment Insurance and Canada Pension Plans, interest paid on student loans, and adoption expenses. 

Most territories and provinces have tax credits to reduce the territorial and provincial taxes owed.

Refundable tax credits

Refundable tax credits are paid to anyone who qualifies for them, whether they have income or not. 

Refundable tax credits are also used to reduce the amount you owe first, but unlike nonrefundable tax credits, any remaining refundable tax credit is refunded to you. 

Some common refundable tax credits include the Canada Workers’ Benefit, Canada Training Credit, and the Eligible Educator School Supply credit.

Tax deductions

Tax deductions don’t work as many people suppose (or hope). 

Instead of reducing the amount of taxes you need to pay, a tax deduction reduces the income you are taxed on, which can put you in a lower tax bracket and, thus, reduce the amount of taxes you will owe.

The most common tax deductions are:

  • Pension Adjustment. You get credit for any pension contributions made in the calendar year on your behalf. 

Your employer will list the Pension Adjustment amount in box 52 on your T4 slip, which lists your income and income tax deducted for the year.

  • Union and professional dues
  • Child care expenses
  • RRSP contributions up to the maximum allowable amount per year. 

Your financial institution will provide you with a contribution receipt.

You can find out how much RRSP contribution room you have by looking at your Notice of Assessment, your CRA “My Account,” or by calling the CRA at 1-800-959-8281. 

You can also learn more about RRSP contribution limits.

What Are The Important Dates To Keep In Mind?

  • March 1, 2024: Deadline to contribute to an RRSP, a PRPP, or an SPP to deduct against your 2022 income.
  • April 30, 2024 (extended to May 1, 2024, since April 30 is a Sunday): Deadline to file your return and pay your taxes.
  • June 15, 2024: Extended deadline to file your return if you, your spouse, or common-law partner are self-employed (note that payment must be made by April 30).
  • Most individuals who have to pay tax installments must pay by these due dates: March 15, June 15, September 15 and December 15.

What Is The Difference Between Your Average And Marginal Tax Bracket?

Canada uses a progressive tax system, meaning individuals pay higher tax rates the higher their income gets. 

Every year, the federal and provincial governments determine the income ranges and the applicable tax rates for those ranges (the “tax brackets”). 

These tax brackets are reset each year because they are adjusted upwards to account for inflation. 

Your income is divided into different brackets and is taxed at higher rates the higher the income bracket.

Your marginal tax rate is the taxation rate on your last dollar of taxable income

Your average tax rate is calculated by dividing your taxes paid by your taxable income. 

Remember: both the federal and provincial governments come out with their tax brackets, so a bit of math is involved in calculating your average and marginal tax rates.

We have taken out the guesswork: Fidelity has a tax calculator tool that helps you quickly calculate your average tax rate, total taxable income and year-end balance (or refund) based on your total income and total deductions.

What Is Income Tax?

You must pay a portion in taxes for almost every dollar you earn.

It was sometimes different. Before World War I, Canada was a tax-free haven. 

Unlike England and the United States, Canada prided itself on its “no federal taxes” policy and used it to attract desperately needed skilled immigrants, investors, and capitalists. 

The government made money primarily by selling off natural resources and charging high customs fees on imported goods.

But in 1917, Finance Minister Sir William Thomas White implemented the Income Tax Act to pay for World War I and asked that it be reviewed after the war. 

Canada has had an income tax ever since.

While income tax may seem natural and inevitable today, it was met with resistance at the time and considered a significant burden.

When income taxes were first introduced in 1917, single people had a personal exemption of $29,757 in today’s dollars, while married people had an exemption of $59,514. 

Over those amounts, they were taxed at just 4%.

Now, married and single people have identical federal personal exemptions at around $15,000. 

The top federal tax rate is 33%, and when we add in provincial tax rates, the total marginal tax rate now reaches 54.8%.

But we pay it without (much) complaint because it’s the price of living in a prosperous nation. 

As Oliver Wendell Holmes, the 19th-century U.S. Supreme Court Justice, said, “I hate paying taxes. But I love the civilization they give me.”

The Canada Revenue Agency (CRA) collects this money to pay for the government’s operating expenses and delivery of services. 

Taxes are why we have hospitals, high schools, the military, the police force, libraries, roads, prisons, and the CBC. 

The government redistributes much of these taxes to low-income families and vulnerable Canadians through child benefits, employment insurance, old age security, and social assistance.

How Does Income Tax Work In Canada?

You must report your income to the CRA annually by filing paperwork known as a tax return. 

In this return, you must list all your income sources and note your eligibility for tax deductions or tax credits.

The tax system is based on trust. Although the CRA does know about some of your income, they mostly rely on citizens to self-report their total income accurately.

The CRA recommends you file a return even if you do not earn any money. You may be out on free money if you get your taxes. Some payouts you may be eligible for include:

  • Canada Child Benefit
  • GST/HST credit
  • Guaranteed income supplement

Deadline to pay your income taxes

The deadline to pay taxes, for those who earn enough to do so, can be confusing because the date you must pay sometimes lines up with the date you must file.

Employed individuals have the same payment and file date: April 30 (if this falls on a weekend, the tax deadline is the next business day). 

That’s because their taxes usually get taken off at the source on each paycheque, so their tax calculation is more straightforward.

Self-employed individuals must pay any taxes owed in a tax year by April 30, but they have until June 15 to file their return.

The CRA charges a fee for late filers — 5% of your balance owed plus an additional 1% for each month late (to a maximum of 12 months).

What Income Tax Do You Get In Canada?

Canada has a graduated or progressive tax system, which means the more you earn, the more you pay.

This system divides money into income brackets, determining the applicable tax rate. 

A common mistake is to assume that all income is charged at the rate of its highest tax bracket. 

We are charged progressively, which means that first, you pay the rate in the lowest bracket and only pay the higher rate on each additional dollar. 

This is also called your marginal tax rate.

For example, if you earn $1, you’ll pay 10%. But on the second dollar, you’ll have to pay 20%.

And on the third dollar, you’ll be on the hook for 30%. But you never have to pay 30% of $3. Instead, you pay just $0.60, which equals an average tax rate of just 20%.

Some find this graduated system fair, while others believe it burdens hard workers, penalizes success, and discourages prosperity.

Corporations are the exception to this system, however. They pay a flat tax instead of a graduated tax. 

The corporate income tax is a flat tax for small business Canadian-controlled private corporations.

For example, maxes out at 12.20% (9% federal income tax rate plus up to an additional 3.20% provincially/territorially, no matter how much they earn).

Graduated tax rates can be confusing because the income tax brackets don’t depend just on the amount earned — they also depend on where the money comes from. 

Plus, each province has an entirely different tax bracket. You must add the two together to come up with the total rate.

Some Canadians are surprised to learn that not all income is treated equally. 

The government typically gives a tax break to money earned from selling an investment — 50% of the capital gains are taxed at the marginal tax rate, which applies to their taxable income. 

And to encourage jobs and development, small Canadian corporations have meagre tax rates. 

The highest tax rates are the personal income tax rates applied to wages and salaries.

The CRA differentiates between these six types of income sources:

  1. Other income (including employment and interest)
  2. Capital gains
  3. Eligible dividends (from large, public Canadian corporations)
  4. Ineligible dividends (from small Canadian corporations)
  5. General corporate income
  6. Small business corporate income

For example, let’s say you made $55,000 in employment income and live in Ontario. That’s in the second tax bracket, both federally and provincially. 

The federal government charges you 15% on the first $53,359 you make and then 20.5% on the remaining amount. Ontario charges 5.05% on the first $49,231 and 9.15% on the remaining amount. 

That’s what we mean when we say that the more you make, the more you pay.

Dividend money is considered to have already done its duty since it comes from after-tax corporate profit. 

Instead, you might also be eligible to receive a dividend tax credit, a nonrefundable tax credit meant to offset the effect of double taxing.

Income that’s not taxable.

Luckily, not all income is taxable. Here are some examples of income that is not taxed in Canada:

  1. Most lottery winning
  2. Most inheritances and gifts
  3. Canada Child Benefit payments
  4. GST/HST credit payments
  5. Payouts from a life insurance policy
  6. School scholarships
  7. Withdrawals from a Tax-Free Savings Account (TFSA)
  8. Strike pay from a union

How To Reduce Your Income Tax?

Paying what you owe in income taxes is a civic duty. But there’s no reason to pay a penny more than is required. 

Finding ways to reduce your taxable income is legal and financially responsible. 

Strategies to do so range from the simple and the common — maximize deductions — to the elaborate and esoteric — like buying flow-through shares. 

Many tax preparation programs can help you find the deductions and credits you qualify for. 

For truly complex and unique situations, a good accountant will be the best person to help find the optimal tax efficiencies in your particular situation.

But here are a few ideas:

  • Change up your income sources: Our government gives preferential treatment. 

Employment income and interest bear the heaviest burden, while capital gains and dividends are barely touched. 

Instead of relying on a job and stashing funds in a savings account, many people try investing. 

If you can manage, over the long term, to transfer surplus income from your salary into an investment portfolio, you can shelter much of your funds from taxes.

Move from sole-proprietorship to incorporation: If you’re a freelancer or have a small business, consider switching from a sole-proprietorship to a corporation. 

While incorporating comes with heavier compliance requirements and a trickier tax return, it could drop your tax rate significantly. 

In Ontario, for example, high earners would go from a marginal tax rate of 46.16% to just 12.2%. 

That’s only inside the corporation — once you transfer the funds and pay yourself a salary or dividend, you’ll have to pay income taxes at regular marginal tax rates. 

This strategy will only save you on taxes if you make enough to retain income inside the corporation. 

Speak with a professional accountant to see if your small business can benefit from this tactic.

  • Defer taxes: There’s a concept in financial planning that states that money today is always better than money tomorrow. 

If there’s a way to put off paying taxes until tomorrow, you should always take advantage of that opportunity. 

That’s because money can grow over time, and the more money you have, the faster it can grow. Paying taxes impedes this process. 

The most obvious way to defer taxes is to stash funds and invest inside your Registered Retirement Savings Plan (RRSP). 

The money can grow sheltered from taxes until you withdraw funds in retirement. 

Eventually, you’ll have to pay the piper, and your marginal tax rate will be lower than in your prime working years. 

You can do the same in your TFSA. Although you’re contributing with after-tax funds, the money, once inside, will also be able to grow free, away from the long reach of the CRA. 

A newly introduced tax deferral option is the First Home Savings Account (FHSA), which allows you to save up to $40,000 to purchase your first home. 

Like the TFSA, the money can grow tax-free once inside the FHSA.

For investors and small business owners, a common way to defer taxes is to leave money inside a corporation for as long as possible. 

If you own an investment property, you can write off the depreciation yearly, which delays paying taxes until you sell the property.

There’s still a lot of wiggle room in the tax code to postpone your tax obligations and put your money to use better.

Maximize all deductions: Deductions work by lowering your income, hopefully enough to kick you down a tax bracket. 

Credits work by lowering your payable taxes, hopefully down to zero. Typical tax deductions include union dues, RRSP contributions, childcare expenses, and capital losses. 

Typical tax credits include charitable donations, medical expenses, caregiver amounts, and the Canada Workers Benefit.

How To Calculate Income Tax In Canada?

Calculating your exact income tax is a challenging task. Canada’s tax system is a warren of baffling codes, 1.1 million words long.

A rough tax estimate can be done by first figuring out your total income minus any applicable deductions. 

Then, multiply your income per source by its suitable marginal tax rate (territorial, provincial, and federal taxes).

Use an online tax calculator to estimate your net income and income tax.

Conclusion

And there we have it, a complete roundup of Canada’s income tax brackets, simplified and demystified.

Just like mastering the perfect hockey shot, understanding where you fit within these brackets can make all the difference in how you manage your finances.

Armed with this knowledge, you’re now ready to navigate the tax season with greater confidence and precision. Remember, in the game of taxes, being well-informed is your best offense and defense.

Happy planning!

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