CRA & Revenu Québec

How Are Canadian Taxes Calculated?

In Canada, personal income taxes are calculated based on your income, minus the deductions for which you qualify, to arrive at a taxable income. From that income, you are taxed by the federal government and then by your provincial or territorial government. The rate at which you are taxed is broken down into tax brackets. The rates increase with higher income levels in thresholds determined by the government.

Calculating Your Taxes

At a high level, your individual taxes start with all the income you have earned during the year. This includes income from your employment, business, capital gains, investment income, interest income and dividends. If you are a Canadian resident, these amounts include any worldwide earned overseas and not just those garnered from Canadian sources.

The next step is to find out whether you qualify for any deductions that can lower your overall taxable income. A deduction or write-off reduces your taxable income, from which your federal taxes are calculated.

A tax credit is a direct reduction of the payable tax. Credits can be in the form of refundable credits or non-refundable credits. Refundable credits act as if you paid the funds already and can be fully refunded if used. Non-refundable credits act more like deductions in that they become worthless once you reach the point of paying the tax at all during the year.

Once you determine your taxable income, your federal tax is calculated based on the current federal tax rates and brackets. The tax rates are applied for each tax bracket of income. As your income hits higher thresholds, the next bracket of income is taxed at a higher amount.

From the federal amount, various federal non-refundable tax credits are then applied to give you the net federal tax balance that you owe.

The province or territory where you live taxes your taxable income in a similar manner as the federal government, using tax and earnings brackets in another escalating rate. At this point, provincial or territorial credits are applied, as well as other special adjustments, such as provincial surtax, health care level or self-employment CPP. These are all unique adjustments and vary depending on your province or territory. After these are all considered, you arrive at the taxable amounts that you owe.

Credits

Maximize your tax credits to reduce your taxes. Common credits are the basic federal credit (which every individual receives), spousal credit and student credits for tuition and textbook fees. There are a large number of specific child credits, such as the amount for children, a deduction for child care expenses, the children’s art tax credit and the children’s fitness credit.

Part of effective tax planning also involves reviewing opportunities to transfer credits between spouses. When allowed, ensure that the highest income earner takes advantage of as many credits and deductions as possible due to the higher percentage tax he would pay compared to the lower-earning spouse.

References & Resources