Changes in Personal Income Tax Rates in Alberta
In 2014 and previous years, residents of Alberta faced a 10% income tax on all taxable income. In 2015, the Alberta Treasury Board and Finance implemented five new tax brackets with income tax rates ranging from 10% to 11.25%. In 2016, personal income tax rates in Alberta increased again with the top rate reaching 15%. However, despite these increases, most Albertans should pay lower income tax in 2016 than in previous years.
2016 Personal Income Tax Rates in Alberta
As of tax year 2016, the province of Alberta uses the following tax brackets:
- 10% on taxable income up to $125,000
- 12% on taxable income from $125,000 to $150,000
- 13% on taxable income from $150,000 to $200,000
- 14% on taxable income from $200,000 to $300,000
- 15% on taxable income over $300,000
2015 Personal Income Tax Rates in Alberta
The 2016 rates are slightly higher than the provincial income tax rates from the previous year. In 2015,
the income brackets were the same, and all taxable income less than $125,000 was taxed at 10%. However, the other brackets had slightly lower rates as follows:
- 10.5% on taxable income from $125,000 to $150,000
- 10.75% on taxable income from $150,000 to $200,000
- 11% on taxable income from $200,000 to $300,000
- 11.25% on taxable income over $300,000
Understanding Taxable Income
All of the above tax brackets reference taxable income. This is not the same as the earnings you receive from your employer or your business. Rather taxable income is the total of your income from all sources (wages, self-employment, investments, pension payments, etc.) minus your deductions and amounts. A deduction refers to tax savings you receive in exchange for child care, medical, and similar types of expenses. An amount is simply a block of income that is not taxed based on your personal situation.
To explain, imagine that after adding up all your income and taking away your deductions, you have $50,000 in net income. At this point, you may subtract your personal amount. Alberta has the highest basic personal amount in Canada. As of 2015, the basic personal amount is $18,214. When you subtract this figure from your net income, the difference is $31,786, which is your taxable income. However, if you are over a certain age, have dependants, or meet other criteria, you will qualify for other amounts, lowering your taxable income even further.
Effects of the New Personal Income Tax Rates
Although income tax rates in Alberta have increased over the last two years, only 7% of residents are
expected to pay higher provincial income taxes. This is because 93% of Albertans fall in the lowest tax bracket, and accordingly continue to face the traditional 10% tax rate.
How Marginal Tax Rates Work
To illustrate how marginal tax rates work, imagine you live in Alberta and earn $350,000 per year. This
puts you in the top tax bracket, but you don’t pay the 15% rate on all of your income.
Instead, the first $125,000 is taxed at 10%, making your provincial income tax on that portion of your income $12,500. The next $25,000 faces a 12% tax rate, resulting in $3,000 in income tax. The next $50,000 is taxed at 13%, which equates to $6,500 in income tax. The next $100,000 of your income receives a 14% rate, the equivalent of $14,000 in income tax, and finally, the last $50,000 of your taxable income is taxed at 15% or $7,500.
When you add up the income tax you owe from each bracket, your total provincial income tax is $43,500. If you want to see your effective tax rate, you can divide the amount of income tax you owe by your taxable income. In this case, this means dividing $43,500 by $350,000. The result of 12.4% is your effective tax rate. However, this rate just reflects your provincial income tax. You also have to pay federal income tax, and the Canada Revenue Agency uses different tax brackets than the government of Alberta.
Federal Income Tax Rates
As of tax year 2016, the Canada Revenue Agency uses the following personal income tax rates:
- 15% on taxable income up to $45,282
- 20.5% on taxable income over $45,282 up to $90,563
- 26% on taxable income over $90,563 up to $140,388
- 29% on taxable income over $140,388 up to $200,000 33% on taxable income over $200,000
To continue with the above example, if you have $350,000 in taxable income, you owe $95,817 in federal income tax. That relates to an effective tax rate of 27.4%, and with your Albertan income taxes, that makes your total income tax $139.317, or 39.8% of your taxable income.