How Canada’s Tax System Works
Canadian income tax rates or brackets vary according to the total amount of income you earn, and how much of that income is considered to be taxable income.
The Canadian tax system is a progressive (or graduated) system which means low-income earners are taxed at a lower percentage than high-income earners; the more money you make, the more taxes you pay.
Canada’s Federal Income Tax Brackets for the 2020 tax-year:
Taxable Annual Income
|15%||on the first $48,535||$48,535|
|20.5%||on the next $48,534||$48,536 up to $97,069|
|26%||on the next $53,404||$97,070 up to $150,473|
|29%||on the next $63,895||$150,474 up to $214,368|
|33%||on the portion over $214,368||over $214,368|
Canada’s Federal Income Tax Brackets for the 2021 tax year:
Taxable Annual 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|
Understanding Canada’s Income Tax Brackets
The tax rates, also known as tax brackets, apply to personal income earned between predetermined minimum and maximum amounts. By understanding where your income falls within the tax brackets can help you make decisions about when and how to claim certain deductions and credits.
By understanding what tax bracket you are currently in, it can also help you understand changes in your income taxes if, for example, you start a side-gig or have other extra income that pushes you into the next bracket.
When you’re preparing your income taxes this year, this could explain why you have taxes owing or your refund amount is different than what it was last year.
The applicable rates are listed below for the current tax year. It is important to note that these rates apply to taxable income, which is your Total Income from Line 15000 less any deductions you may be entitled to.
Remember, all provinces and territories also have their own tax brackets. When using the tax brackets and your annual earnings to make contribution decisions, make sure to also consider the tax rates for the province where you reside. Click on this link for both federal and provincial rates.
An Example of How Canada’s Tax Brackets Work
If your taxable income is less than the $48,535 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.
However, if your income is $200,000, you face several tax rates. This example shows how much “federal” tax you will pay on your 2020 taxable income. You need to make a separate calculation for your provincial tax due.
- The first tax bracket – $0 to $48,535 is taxed at 15%, plus
- The next tax bracket – over $48,535 to $97,069 is taxed at 20.5%, plus
- The following tax bracket – over $97,069 to $150,473 is taxed at 26%, plus
- At this point, $150,473 of your income has been taxed. The final bracket on your remaining $49,527 is taxed at 29%.
- If you earn more than $214,368 in taxable income in 2020, the portion over $214,368 is taxed at the federal rate of 33%. This is called the “top tax bracket” and a common misconception is “if your taxable income is in this top bracket, you will be taxed at 33% on your entire income”.
For a further explanation of tax brackets and rates, see this CRA link.
In Canada, taxpayers pay income tax to the federal government and to the government of the province/territory where they reside. In all provinces/territories, except Québec, the federal government collects the provincial/territorial tax and gives it back to them in the form of various programs. Québec collects and manages its own income tax.