Are you doing some tax planning or starting your own business? Whether you are a Canadian resident or a recent newcomer, educating yourself about the income tax rates in Canada is very important in both your personal and professional lives.
If you are an independent consultant, you need to know how much to set aside for taxes. If you are working at a high-paying job, you need to know how much money will come from your salary for taxes. And if you are starting a new business, including taxes in your financial models will show investors that you did your research and know what to expect. No doubt, taxes are important to know about.
However, the income tax rate in Canada is not one set number. So, let’s learn about how income taxes work in Canada and how you can best prepare yourself.
Canada Tax System
First off, the Canadian tax system is based on progressive brackets – the more money you make, the more taxes you have to pay. These brackets differ between individual and corporate income. Another critical thing to know about Canada’s tax system is its principle of self-assessment – you need to submit your tax return every year and either receive a tax refund or pay additional taxes. Of course, if you hire a professional accountant or tax specialist to file your taxes for you, they will be familiar with the process and save you many hours of research to ensure you do your taxes correctly. Whether you file on your own or with a professional, it’s still crucial to know the income tax rates yourself.
Who charges me for taxes?
When you go to the store and buy something, you pay a 13% tax on it, a mix of federal and provincial taxes (GST and HST). The same applies to income taxes. There is a federal tax rate (with progressive brackets), and there are separate provincial or territory taxes on top of it, depending on where you live. The tax systems by province and territory are mostly similar, and all share the same self-reporting principle.
What if I have different types of income?
You may get paid from your full-time job, have investments, and have another stream of passive income flow. These different incomes are taxed at different rates. The main four groups of income are the following:
- General income: employment (tips, commissions), employment benefits (company car, dental care), social benefits, interest, pensions. Your employer must withdraw taxes from your pay and send the amounts to CRA, issuing you a T4 slip once a year with all the information.
- Income from dividends paid to company shareholders: dividends receive a special tax deduction that can lower the tax rate.
- Income from selling shares: includes income from selling a property, where the tax applies to only half of the profit made on the transaction (if your home is your primary residence, it is exempt from tax obligations)
- Self-employment income: you are only taxed on your net income (total income – expenses), so log all of your expenses for accurate record keeping. Please familiarize yourself with self-employment income taxes, so you know when to send them in.
Federal Tax Rates for Individuals
The first column of the table lists the brackets of individual income, the second column shows the applicable federal tax based on the amount, and the third column is the rate at which tax is incurred with an additional dollar of income (your federal tax rate).
| Taxable Income (from – to) | Marginal Rate on Excess |
|---|---|
| $0 – 48,535 | 15.0% |
| $48,536 -97,069 | 20.5% |
| $97,070-150,473 | 26.0% |
| $150,474- 214,368 | 29.0% |
| Over $214,369 | 33.0% |
“But what if I make $60,000 a year? How much in tax would I pay?” you may ask. This is where the marginal rate on excess comes into play. Here is how you would calculate your total tax to pay for the year:
First $48,535 of $60,000 = pay $7,280.25 in taxes at the rate of 15%.
For the remainder ($60,000-$48,535 =$11,465) = pay 20.5% in tax.
$11,465 *20.5% = $2,350.33 since now you are in the second bracket between $48,536 and 97,069
Provincial and Territorial Income Tax Rates
| Provinces / Territories | Rates for 2020 tax year |
|---|---|
| Newfoundland and Labrador | 8.7% on the first $37,929 of taxable income, + 14.5% on the next $37,929, + 15.8% on the next $59,574, + 17.3% on the next $54,172, + 18.3% on the amount over $189,604 |
| Prince Edward Island | 9.8% on the first $31,984 of taxable income, + 13.8% on the next $31,985, + 16.7% on the amount over $63,969 |
| Nova Scotia | 8.79% on the first $29,590 of taxable income, + 14.95% on the next $29,590, + 16.67% on the next $33,820, + 17.5% on the next $57,000, + 21% on the amount over $150,000 |
| New Brunswick | 9.68% on the first $43,401 of taxable income, + 14.82% on the next $43,402, + 16.52% on the next $54,319, + 17.84% on the next $19,654, + 20.3% on the amount over $160,776 |
| Quebec | 15% $44,545 or less 20% More than $44,545 but not more than $89,08024% More than $89,080 but not more than $108,390 25.75% More than $108,390 |
| Ontario | 5.05% on the first $44,740 of taxable income, + 9.15% on the next $44,742, + 11.16% on the next $60,518, + 12.16% on the next $70,000, + 13.16 % on the amount over $220,000 |
| Manitoba | 10.8% on the first $33,389 of taxable income, + 12.75% on the next $38,775, + 17.4% on the amount over $72,164 |
| Saskatchewan | 10.5% on the first $45,225 of taxable income, + 12.5% on the next $83,989, + 14.5% on the amount over $129,214 |
| Alberta | 10% on the first $131,220 of taxable income, + 12% on the next $26,244, + 13% on the next $52,488, + 14% on the next $104,976, + 15% on the amount over $314,928 |
| British Columbia | 5.06% on the first $41,725 of taxable income, + 7.7% on the next $41,726, + 10.5% on the next $12,361, + 12.29% on the next $20,532, + 14.7% on the next $41,404, + 16.8% on the amount over $157,748 |
| Yukon | .4% on the first $48,535 of taxable income, + 9% on the next $48,534, + 10.9% on the next $54,404, + 12.8% on the next $349,527, + 15% on the amount over $500,000 |
| Northwest Territories | 5.9% on the first $43,957 of taxable income, + 8.6% on the next $43,959, + 12.2% on the next $55,016, + 14.05% on the amount over $142,932 |
| Nunavut | 4% on the first $46,277 of taxable income, + 7% on the next $46,278, + 9% on the next $57,918, + 11.5% on the amount over $150,473 |
We highlighted Ontario since that is where Taxory provides accounting services to our clients. These taxes are charged in addition to the federal income taxes, so make sure you add your federal and provincial/territorial marginal tax rates together.
Important Notes about Canada’s Tax System
The Government of Canada also specifies the following:
- “While the tax principle is that all income treated the same, many exceptions mean that some forms of income can be taxed at a higher or lower rate, or even be tax-free.
- A graduated income tax system means that people with a lower income pay a lower tax rate than people with a higher income.
- You pay income tax on your taxable income—your total income minus allowable deductions or exemptions.
- You can calculate your average tax rate, but when you make more income, it will be taxed at your marginal tax rate.”
Hopefully, that shed light on Canada’s tax system and helped you understand how much to pay in income taxes and what the Canadian income tax rates are. If you need help with filing your tax returns, please don’t hesitate to reach out.
Anna Grigoryan is a public accountant who provides accounting, bookkeeping and tax services to Small Business owners and individuals. She has more than ten years of professional experience in public accounting and a bachelor’s degree in Business Accounting. Anna is the founder and CEO of Taxory, an accounting firm located in Ontario, Canada.