Canadian Income Tax
&
Tax Brackets

Federal and Provincial Tax Rates

Income tax in Canada is a topic with a lot of misconceptions and misinformation. The biggest one is when people say “If I make any more money I’ll go in to the next tax bracket and actually lose more money than I made”. That is not something that can actually happen, and if there is anything you take away from this page, it should be: In no circumstance will making more money cause you to be taxed more than the income you just received – so go make that money.

In Canada, there are two different types of income taxes, taxed at different rates. They are Federal and Provincial income taxes. Federal rates are the same across the country while provincial vary from province to province. The amount of tax you owe is calculated using marginal tax rates. This means, that there are different income brackets that are taxed at different rates. We’ll use the federal rates as an example since they are equal across the country:

Income Tax bracket rates

  • $0 - $48,535 15%
  • $48,536 - $97,069 20.5%
  • $97,070 - $150,473 26%
  • $150,474 - $214,368 29%
  • $214,369+ 33%
calculator, calculation, insurance

The way brackets work is that the money you make first is taxed at the lowest bracket until it is full, then your rate goes up and you are now taxed at the next rate. So if you make $50,000, you will be taxed at 15% until you have made $48,535, and then 20.5% for the remainder. Now you are probably wondering why your tax rate doesn’t change throughout the year as you move in to the next bracket. Your payroll person tries to calculate the average amount of tax you will pay in a year based on your income (in this scenario, a little over 15%), so it doesn’t fluctuate much throughout the year. For this reason, it is likely if you get a really big cheque due to a bonus or something, you will notice the tax rates are much different. Payroll most likely won’t pay the perfect amount of taxes either, we will talk about that a little further down when we mention tax returns.

Lets try another example: You are going to make $100,000 this year, how much are you going to be taxed? If you looked at the rates, seen $100,000 is between $97,000 and $150,000, and figured it must be 26% – that is not correct. You will not be taxed $26,000. The first $48,535 is taxed at 15%. $7,280.25. From $48,536-$97,069 is another $48,534. This amount will be taxed at 20.5%. $9,949.47. The remaining $2,930 from $97,070-$100,000 will be taxed at 26%. $761.8. Now we add them all up: $7,280.25 + $9,949.47 + $761.8 = $17,991.52. That’s a lot less than the $26,000 it looks like it would be at a quick glance! Divide it by $100,000 and multiply it by 100 to see the average tax rate you would pay for federal taxes if you made $100,000 this year. 17.99%!

Unfortunately, federal taxes aren’t the only ones you will be paying. Provincial income tax is also quite expensive. You can find the rates for your province on the Government of Canada website. Provincial income taxes are also marginal and start at about an average of ~9%, they climb with income as high as 21% in provinces like Nova Scotia! This means at higher brackets you could be paying more than 50% into income tax!

Tax Return Time

Tax return time happens once a year for your average person – you should get your T4 (A tax form given to you by your employer) by February 28th each year and you have until April 30th to file your tax return. A tax return is documentation completed and sent to the government to assess your liability for taxes. You can complete them yourself or pay a firm to do it for you. The more accurately your payroll deducted taxes throughout the year, the closer this number will be to $0. Payroll usually over-deduct and therefore you will normally receive a tax refund (cash back) from the government. You will also receive a bigger refund if you have any tax write-offs or contributions to applicable tax advantaged savings accounts like the Registered Retirement Savings Plan (RRSP).