It’s a yearly rite of passage for Canadians to jump through hoops trying to figure out how much tax to pay. Normally, it’s an exhausting exercise. But we’ve gathered all of there relevant information in one place to help you get through everyone’s least favourite season. Here’s what you need to know about income tax rates.
How to Identify your Tax Bracket
How much tax you’ll pay is determined by where you live in Canada, and how much income you declare from all sources. Importantly, your provincial rate is determined by the province you are living in on December 31 of the tax year. So, if you move from Ontario to Nova Scotia in July, and you find yourself living in Nova Scotia on December 31, you would fall under the Nova Scotia provincial tax rates.
How Tax Brackets Work
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 what your taxable income is, you’ll then apply the relevant federal and provincial rates to your net taxable income. You should calculate your federal income tax first, your provincial rate second, and then add the two together — and presto!
Your marginal tax rate is the combined federal and provincial income taxes you pay on all sources of income at tax time. The tax rate varies by how much income you declare at the end of the year on your T1 General Income Tax Return (the form with the exciting-sounding name that you fill out at tax time) and where you live in Canada.
Federal Tax Bracket Rates 2021
The following are the federal tax rates for 2021 according to the Canada Revenue Agency (CRA):
- 15% on the first $49,020 of taxable income, and
- 20.5% on the portion of taxable income over $49,020 up to $98,040 and
- 26% on the portion of taxable income over $98,040 up to $151,978 and
- 29% on the portion of taxable income over $151,978 up to $216,511 and
- 33% of taxable income over $216,511
Provincial Tax Brackets Rates 2021 (in addition to federal tax)
Like we said, the province you are living in on December 31 will determine the provincial portion of your income tax. So, if you are planning skipping town to a province with lower taxes, do it before December 31 of the calendar year.
Example of tax calculation
Meet a fictional chap named John who lives in British Columbia. John has been contributing to a Wealthsimple RRSP to reduce his taxable income. After his RRSP contribution and other tax deductions and tax credits, he has taxable total income of $55,000. Here’s what his tax calculation might look like:
John’s Federal tax bill The first $49,020 is taxed at 15% (the lowest income tax bracket), which works out to $7,353. He has $5,980 remaining, ($55,000-$49,020) — that amount will be taxed at a higher rate of 20.5% which works out to $1,225.9. This means his total federal tax owing is $7,353 + $1,225.9 = $8,578.9
John’s provincial tax bill (using BC rates as example) Remember, John’s provincial rate is based on his province of residence as of December 31 of the calendar year. John’s first $42,184 will be taxed at 5.06%, which works out to $2,134.51. The remaining $12,816 ($55,000-$42,184) will be taxed at 7.7% which works out to $986.83. His total provincial tax is $3,121.34.
John’s total tax bill John’s combined federal and provincial taxes owing is $8,578.9 + $3,121.34 = $11,700.24.
Tax Credits and Tax deductions
Tax credits and tax deductions can reduce either your income or the amount of tax you owe.
Tax credits
Both federal and provincial tax credits exist, and you’ll be glad to hear they help you pay less tax. There are two types: Non-refundable and refundable
Non-refundable
A non-refundable tax credit reduces the amount of tax payable. In order to claim a non-refundable tax credit, you must actually owe taxes — in other words, you must have earned enough income to owe income tax. Non-refundable tax credits can reduce your tax owing to zero, but if you have more tax credits than tax owing, you do not receive a refund for any surplus amount. Let’s make that more concrete: if you owe $2500 in taxes and have non-refundable tax credits for $2700, your taxes will be reduced to zero, but you will not receive the extra $200.
Some non-refundable tax credits include:
- Personal exemption amount (anyone who owes tax is entitled to claim this exemption)
- Exemption for taxpayers over age 65
- Exemption for taxpayers with children
- Exemption for people receiving a pension
- Exemption for people with a certified disability
- Exemption for people who are caregivers to someone with a disability
Some other non-refundable tax credits include tuition, medical expenses, Employment Insurance and Canada Pension Plan deductions, interest paid on student loans and adoption expenses. Most provinces have tax credits to reduce the provincial tax owing.
Refundable Tax Credits
Refundable tax credits are paid to anyone who qualifies for them, whether they had income or not. Usually, they’re paid out over the year. The most well-known non-refundable tax credit is the GST/HST payment that people with a combined family income of less than $42,000 received.
Tax deductions
Tax deductions don’t work as many people suppose. Instead of reducing the amount of taxes you need to pay, a tax deduction actually reduces the amount of your gross income, which can put you in a lower tax bracket and 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 T-4 slip that lists your income and income tax deducted for the year.
- Union and professional dues
- Child care expenses
- Registered Retirement Savings Plan (RRSP) contributions up to the maximum allowable amount per year. Your financial institution will provide you with a contribution receipt, and you can find out how much RRSP contribution room you have by looking on your Notice of Assessment (the summary form that you receive after you have filed your previous year’s taxes), by looking on your tax account or by calling CRA at 1-800-959-8281. You can also learn more about RRSP contribution limits.
- Donations to charitable organizations or political parties
Christopher Liew a Chartered Financial Analyst and the founder of Wealth Awesome explains the importance of understanding the difference between income tax and capital gains tax.
“Understand the Canadian tax rules for different investment types, such as interest income being 100% taxable while capital gains are only 50% taxable. You can save more on taxes if you put interest-earning assets into your TFSA or RRSP.”
If you owe income tax, the Canada Revenue Agency will let you work out a payment plan if you cannot pay the taxes all at once. You will be charged interest on any balance you still owe. But be careful: if you owe income tax and don’t pay, and you don’t make an attempt to work out a payment plan, CRA can seize any refundable tax credits you may be eligible for, and they may take you to court and seize the contents of your bank account. Here’s more information about potential consequences for non-payment of taxes.
If you want to reduce your tax bill, Wealthsimple has a number of financial products such as RRSPs, that can help you reduce the amount of income tax you pay. For a limited time get $10,000 managed free for a year when you sign up for a new Wealthsimple account.
