In Canada, your income is taxed both by the federal government and the province or territory in which you reside on December 31st of the tax year. Your taxable income is the amount used for determining how much federal and provincial income tax you will need to pay by determining which tax brackets your income falls into, and then ultimately, your tax rate (or rates in some cases). You can find both the federal and provincial tax rates in this link: Canada Revenue Agency: Canadian Income Tax Rates for Individuals – Current and Previous Years.
Where is My Taxable Income Listed?
You can find your taxable income on Line 26000 of your Income Tax and Benefit Return. This line lists your taxable income and is calculated from your Total Income – Line 15000, minus certain deductions and losses.
What Counts as Taxable Income
You can calculate your taxable income for yourself. First, start by counting up all of the income you received from all sources through the year (from January 1st to December 31st). This includes, but is not limited to:
- Wages and Salaries
- Tips/Gratuities and Casual Earnings not reported on a T4 slip
- Net Rental Property income
- Registered Retirement Savings Plan (RRSP) income
- Net Self-Employment income
- Net Capital Gains income
- Dividends, Investment and Interest income
- And others found in this link from TurboTax.
Not all of the money you receive through the year counts as income. For example, many tax benefits that the federal or provincial government pays to you are not taxable. Non-taxable earnings include:
- Certain tax benefits such as a GST/HST Credit or the Canada Child Benefit (CCB)
- Compensation received from the province for being the victim of a criminal act or motor vehicle accident.
- Most, but not all, lottery winnings, gifts and inheritances, amounts received from life insurance policies, strike pay received from a union and other amounts CRA considers to be windfalls.
- Windfalls can also include:
- Amounts paid by Canada for disability or death of military members due to war service.
- Other military death and disability payments made by other countries, depending on the tax rules in that country.
Registered Plans and Taxable Income
If you wish to reduce your taxable income further, you can contribute to a Registered Retirement Savings Plan (RRSP). When you contribute to an RRSP, your allowable contribution (depending upon your limits for the year), will be deducted directly from your taxable income. Money that you take out from an RRSP will be included in your taxable income when withdrawn. Any income earned within the RRSP is tax-deferred.
You can also contribute to a Tax-Free Savings Account (TFSA). When you contribute to a TFSA, there are no immediate savings on your tax return, however, most money you take out from your TFSA will not be taxed.
It is very important to remember that there are maximum contribution amounts for both your TFSA and your RRSP that you cannot exceed. Check your CRA My Account for your carry-forward limits before making a contribution.
How Does My Taxable Income Determine My Tax Payments?
Canada has a progressive tax system, which means that you are taxed more as you earn more money. You don’t pay the same amount of tax on every dollar you earn, you move into different tax brackets and are taxed accordingly. In order to determine how much tax you will pay, you’ll use the federal, provincial and territorial rate rates.
Federal tax rates for tax-year 2020 are:
- 15% on the first $48,535 of taxable income, plus
- 20.5% on the next $48,534 of taxable income (on the portion of taxable income over 48,535 up to $97,069), plus
- 26% on the next $53,404 of taxable income (on the portion of taxable income over $97,069 up to $150,473), plus
- 29% on the next $63,895 of taxable income (on the portion of taxable income over 150,473 up to $214,368), plus
- 33% of taxable income over $214,368
A common misunderstanding is that your total tax rate goes up as you make more money. Instead, only the money that is over that tax bracket is taxed at the higher rate. Even someone who made a million dollars this year gets their first bracket amount taxed at 15%. If you make $5.00 over that bracket amount, only that $5.00 over the bottom tax bracket is taxed at the 20.5% rate.
Provincial and territorial tax rates are different than the federal rates. You’ll need to look into your specific province or territory to find the rate you’ll be paying.
Maximize Your Return
Calculating your taxable income properly is an important way to maximize your tax return. If you miss claiming deductions and credits when calculating your income tax, you will end up paying more in income taxes than you should, both to the province and the federal government. TurboTax searches through over 400 deductions and credits to make sure you are maximizing the benefits to your return. You can always start your return in TurboTax Free, and if you feel the need for additional assistance, you can upgrade to any of our paid editions or get Live help from an expert with our Assist & Review or Full Service*. But don’t worry, while using the online version of the software when you choose to upgrade, your information is instantly carried over so you can pick up right where you left off.
*TurboTax Live™ Full Service is not available in Quebec.