In Canada, we have a progressive income tax system with graduated tax rates, which means that the more income you earn, the more tax you pay. Tax is calculated using a system of tax brackets, essentially ranges of taxable income, with different tax rates associated with each range that get progressively higher.
Federal and Provincial Tax Brackets and Tax Rates
As a Canadian resident, you pay income tax to both the Federal Government and to the Provincial Government where you live (you also pay municipal taxes such as property taxes). As a result, there are different federal and provincial tax brackets and tax rates, which also vary from province to province. The tax brackets, just like tax credits and deductions, are indexed to inflation using the Consumer Price Index. Each year, the previous year's brackets are increased by the rate of inflation: for 2019, an increase of 2.2% was applied to the 2018 brackets.
What is Taxable Income?
Canadian residents pay tax on their worldwide income. Income from all sources like employment, self-employment, interest, dividends, pensions and RSPs, to name a few, are added up to arrive at your total income. Then certain amounts are deducted to get to your net income (examples are RSP deductions, moving expenses, professional dues and interest expense). Finally, deductions for non-capital or net capital losses of other years (and a few other more obscure deductions) are taken to arrive at taxable income. That's an important number because it's used to calculate how much tax you owe.
Calculating How Much Tax You Owe
When you file your personal income tax return (a T1) you calculate the federal income tax you owe on pages six and seven (replacing the old Schedule 1.) Your taxable income is broken up into the different brackets. Tax is then calculated for each bracket based on the appropriate rate and then totaled. The more taxable income you report, the more tax you will pay as your income falls into increasingly higher tax brackets.
A similar process is followed to calculate your provincial tax, but it's based on the provincial tax brackets and tax rates. Other than in Quebec, you don't file a separate provincial tax return. You file one return and the Federal Government processes it, and calculates and collects the tax on behalf of the provinces. If you use tax-filing software, it does all of these calculations for you.
Let's look at an example using 2019 federal tax brackets and tax rates. If your taxable income was $98,000, you'd owe $17,621.11 in federal taxes (before deductions such as tax credits, taxes withheld at source or installment payments), calculated as follows:
|
Federal Tax Bracket
|
Federal Tax Rate
|
Calculation Based on Taxable Income
|
Federal Tax
|
|
Up to $47,630
|
15.0%
|
$47,630 x 0.15
|
$7,144.50
|
|
$47,631 to $95,259
|
20.5%
|
$95,259 - $47,630 = $47,629 x 0.205
|
$9,763.95
|
|
$95,260 to $147,667
|
26.0%
|
$98,000 - $95,259 = $2,741 x 0.26
|
$712.66
|
|
$147,668 to $210,371
|
29.0%
|
n/a
|
|
|
Above $210,371
|
33.0%
|
n/a
|
|
|
Total
|
|
|
$17,621.11
|
Your marginal tax rate is the rate in your highest tax bracket (26% in this example) and is significant because every additional dollar you report is taxed at that rate. Your effective tax rate, however, is only 17.98%, the total tax you pay divided by your total taxable income ($17,621.11/$98,000). Due to the nature of our progressive tax system and graduated tax rates, your effective tax rate is always less than your top marginal tax rate.
