Canadian income tax rates or brackets vary according to the total amount of income you earn, and how much of that is considered taxable income.
Canada’s federal income tax rates for 2021 tax year
|Tax Rate||Tax Brackets||Taxable Income|
|15%||on the first $49,020||$49,020|
|20.5%||on the next $49,020||$49,021 up to $98,040|
|26%||on the next $53,939||$98,041 up to 151,978|
|29%||on the next $64,533||$151,979 up to $216,511|
|33%||on the portion over $216,511||$216,512 and up|
What are tax brackets?
Tax brackets are created by the CRA to determine how much money you need to pay in personal income tax every year. Tax brackets apply to personal income earned between predetermined minimum and maximum amounts, also called tax rates.
In other words, a tax bracket is the tax rate applicable to a set range of income.
The amount you’re taxed depends on your income. The more money you make, the more taxes you pay. This is called a progressive (or graduated) tax system, where low-income earners are taxed at a lower percentage than high-income earners.
How Canada’s personal income tax brackets work
How much federal tax do I have to pay based on my income?
If your taxable income is less than the $49,020 threshold you pay 15 percent federal tax on all of it. For example, if your taxable income (after claiming your deductions and amounts) is $30,000, the CRA requires you to pay $4,500 in federal income tax.
Marginal tax rates
A common misconception is if your taxable income moves to a higher tax bracket that your entire income will be taxed at that higher rate. When in fact, your earnings are divided into different portions that are taxed at the rates that they fall within only.
So, even though you earn more and move into the next tax bracket, not all of your income gets taxed in the higher bracket, it’s just the amount in that range. This is called a “marginal tax rate” which is the amount of additional tax paid for every additional dollar earned as income.
For example, if your income is $200,000, you’ll be taxed based on several tax rates for your 2021 federal income tax.
Here’s the math:
|First tax bracket||$49,020 x 15%||= $7,353|
|Second tax bracket||($98,040 – $49,020) x 20.5%||=$10,048.90|
|Third tax bracket||($151,978 – $98,041) x 26%||=$ 14,023.62|
|Last tax bracket||$64,533 x 29%||= $18,714.57|
|Total = $50,140.09|
If you earn more than $216,511 in taxable income in 2021, the portion over that amount is taxed at the federal rate of 33%. This is called the “top tax bracket”.
Combined federal and provincial tax rates
All provinces and territories also have their own tax brackets. This means that Canadian taxpayers pay income tax to the federal government as well as to the government of the province/territory where they reside.
Your provincial rate is determined by the province you are living in on December 31 of the tax year. So, if you move from Manitoba to Ontario in July, and you find yourself living in Ontario on December 31, you would fall under the Ontario provincial tax rates.
Find out your federal taxes, provincial taxes, and your 2021 income tax refund with this free Canada income tax calculator.
Provincial tax brackets rates 2021
Why does your tax bracket matter?
Knowing where your income falls within the tax brackets helps you understand changes in your income taxes. For example, you start a side-gig or have other extra income that pushes you into the next bracket, this could explain why you have taxes owing or your refund amount is different than what it was last year.
The tax brackets you fall into can also help you make decisions about when and how to claim certain deductions and credits.
Ways to get into a lower tax bracket
Two common ways of reducing your taxes owing and/or improving your tax refund are credits and deductions.
Tax credits are amounts that reduce the tax you pay on your taxable income. Some are refundable and some aren’t. An example of a refundable tax credit is the (GST/HST) credit. An example of a non-refundable credit is the charitable tax credit.
Tax deductions are amounts and expenses you subtract from your income, making your taxable income lower, which reduces how much of your income is subject to taxes. An example would be self-employed business expenses.
Make sure not to overlook any tax credits or deductions you’re eligible to claim.