If you’re wondering how Canadian personal income taxes are calculated fairly, you’ll need to understand how different income levels are taxed.
This article explains the different tax brackets and rates for 2022, how they work, how much you may have to pay, depending on your income level, and province of residence. Then, you’ll learn how to optimize your return with tax credits so that you can be in the lowest possible bracket.
By the end of it all, you’ll understand why your tax bracket matters!
- Tax brackets are created by the CRA to determine how much money you need to pay in personal income tax every year.
- Canadian taxpayers pay income tax to the federal government as well as to the government of the province/territory where they reside..
- Credits and deductions are two common ways of reducing your taxes owing and/or improving your tax refund.
Canada’s federal income tax rates for the 2022 Tax Year
|Tax Rate||Tax Brackets||Taxable Income|
|15%||on the first $50,197||$50,197|
|20.5%||on the next $50,195||$50,197 up to $100,392|
|26%||on the next $55,233||$100,392 up to $155,625|
|29%||on the next $66,083||$155,625 up to $221,708|
|33%||on the portion over $221,708||$221,708 and up|
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. For 2021 tax rates, review this link from the Canadian government, and for Québec residents, review this link from Revenu Québec.
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.
These rates apply to taxable income, which is your total income from Line 15000 less any deductions you may be entitled to.
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 does 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 $50,197 threshold, you pay 15% 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.
What are marginal tax rates?
A common misconception is that if your taxable income moves to a higher tax bracket, 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.
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 $221,708, you’ll be taxed based on several tax rates for your 2022 federal income tax.
Here’s the math:
First tax bracket
$50,197 x 15%
Second tax bracket
($100,392 – $50,197) x 20.5%
Third tax bracket
($155,625 – $100,392) x 26%
Fourth Tax bracket
($221,708 – $155,625) x 29%
$7,529.55 + $10, 289.98 + $14,360.58 + $19,164.07=
Total = $51,344.18
If you earn more than $221,708 in taxable income in 2022, the portion over that amount is taxed at the federal rate of 33%. This is called the “top tax bracket”.
What are 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.
For example, 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.
Provincial tax brackets rates for Tax Year 2022
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, if 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 if 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.
How do you 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: 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 Canada Training credit. An example of a non-refundable tax credit is the charitable tax credit.
Note: the basic personal amount (BPA), is a non-refundable tax credit that all Canadians are entitled to. The Federal BPA is $14,398 for the 2022 taxation year. Make sure to check out the BPA for your province of residence as well.
- Tax deductions: 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.
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