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.
As an independent consultant, you must 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, the Canadian tax system is based on progressive brackets – the more money you make, the more taxes you must 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 independently or with a professional, knowing the income tax rates yourself is crucial.
Who charges me for taxes?
When you buy something at the store, 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 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 four main 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 to 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 –53,359 | 15.0% |
| $53,359 -106,717 | 20.5% |
| $106,717-165,430 | 26.0% |
| $165,430- 235,675 | 29.0% |
| Over $235,675 | 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 of excess comes into play. Here is how you would calculate your total tax to pay for the year:
First $53,359 of $65,000 = pay $8,003.85 in taxes at the rate of 15%.
For the remainder ($65,000-$53,359 =$11,641) = pay 20.5% in tax.
$11,641 *20.5% = $2,386.40 since now you are in the second bracket between $53,359 and 106,717
Provincial and Territorial Income Tax Rates
| Provinces / Territories | Rates for 2023 tax year |
|---|---|
| Newfoundland and Labrador | 8.7% on income up to $39,147 14.5% on income between $39,147 and $78,294 15.8% on income between $78,294 and $139,780 17.8% on income between $139,780 and $195,693 19.8% on income between $195,693 and $250,000 20.8% on income between $250,000 and $500,000 21.3% on income between $500,000 and $1,000,000 21.8% on income above $1,000,000 |
| Prince Edward Island | 9.8% on income up to $31,984 13.8% on income between $31,984 and $63,969 16.7% on income above $63,969 |
| Nova Scotia | 8.79% on income up to $29,590 14.95% on income between $29,590 and $59,180 16.67% on income between $59,180 and $93,000 17.5% on income between $93,000 and $150,000 21% on income above $150,000 |
| New Brunswick | 9.40% on income up to $44,887 14.82% on income between $44,887 and $89,775 16.52% on income between $89,775 and $145,955 17.84% on income between $145,955 and $166,280 20.30% on income above $166,280 |
| Ontario | 5.05% on the first $46,226 of taxable income, + 9.15% on the next $46,226, + 11.16% on the next $57,546, + 12.16% on the next $70,000, + 13.16 % on the amount over $220,000 |
| Manitoba | 10.8% on income up to $34,431 12.75% on income between $34,431 and $74,416 17.4% on income above $74,416 |
| Saskatchewan | 10.5% on income up to $46,773 12.5% on income between $46,773 and $133,638 14.5% on income above $133,638 |
| Alberta | 10% on income up to $134,238 12% on income between $134,238 and $161,086 13% on income between $161,086 and $214,781 14% on income between $214,781 and $322,171 15% on income above $322,171 |
| British Columbia | 5.06% on income up to $43,070 7.7% on income between $43,070 and $86,141 10.5% on income between $86,141 and $98,901 12.29% on income between $98,901 and $120,094 14.7% on income between $120,094 and $162,832 16.8% on income between $162,832 and $227,091 20.5% on income above $227,091 |
| Yukon | 6.4% on income up to $50,197 9% on income between $50,197 and $100,392 10.9% on income between $100,392 and $155,625 12.8% on income between $155,625 and $500,000 15% on income above $500,000 |
| Northwest Territories | 5.9% on income up to $45,462 8.6% on income between $45,462 and $90,927 12.2% on income between $90,927 and $147,826 14.05% on income above $147,826 |
| Nunavut | 4% on income up to $47,862 7% on income between $47,862 and $95,724 9% on income between $95,724 and $155,625 11.5% on income above $155,625 |
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 is 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 it will be taxed at your marginal tax rate when you make more income.”
Hopefully, that shed light on Canada’s tax system and helped you understand how much to pay in income taxes and the Canadian income tax rates. If you need help 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.