The Canada Revenue Agency (CRA) operates a marginal tax rate system, which involves grouping income into “tax brackets.” Income tax rates can vary depending on how much you earn. These rates are applied to different parts of your income.
Income tax is levied on the personal income of Canadian resident individuals and non-resident individuals who earn certain Canadian source income. One of the advantages of the Canadian tax system is that it operates on a progressive system, meaning those who earn more pay more taxes and vice versa.
However, as a Canadian, you are legally required to pay both federal income taxes and provincial taxes to the province in which you reside. The CRA periodically reviews income tax rates, but maintains accessible copies of previous rates on its website.
Let’s take a look at current taxable income and federal income tax brackets for 2023, shall we?
What are the personal income tax rates in Canada?
The federal income tax rates for 2021 are:
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The first taxable income of $48,535 will incur a fee of 15% plus
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20.5% when the next income of $48,534 totals $97,069 plus
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15% on the first $48,535 of taxable income plus
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26% on the next $53,404 of taxable income (on the portion of taxable income above $97,069 up to $150,473) plus
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29% on the next $63,895 of taxable income (on the portion of taxable income above $150,473 up to $214,368) plus
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33% of taxable income above $214,368
Simply put, taxable income is described as “adjusted gross income,” which is your total income (“gross income”), minus any credits or deductions you are entitled to through the CRA.
They generally include your wages, salaries, tips, bonuses, etc. Having a good understanding of where your income stands in tax brackets will allow you to plan when and how to claim deductions and credits.
How do Canada’s tax brackets work?
First, it’s important to understand the effects of additional income like a side job or part-time gig on your taxable income. This helps you get a complete idea of the percentage you have to pay in tax.
If your taxable income (after deductions and credits) falls below the threshold of $48,535, you will have to pay 15% tax on this income. This means that if my taxable income is $35,500, I will have to pay $5,325 in income tax.
However, if your taxable income is around $200,000, you will have to pay different percentages on different parts of the income.
Let’s take for example that I earn $205,650, according to the 2021 income tax rates, I am required to pay:
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15% on the first $48,535, resulting in a tax bill of $7,280.25 plus
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20.5% on the next $48,534, resulting in a tax bill of $9,949.47 plus
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26% on the next $53,404, which gives rise to a tax bill of $13,885.04 more
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29% on the remainder ($55,177), resulting in a tax bill of $16,001.33
This brings my total tax bill to a sum of $47,116.09.
The final bracket applies to you if you earn more than $214,368. You are only required to pay 33% of their taxable income as tax.
Note: These tax rates are the federal income tax rate. You should therefore also consult the tax rates for your specific province to determine your provincial tax.
A look at the 2019 tax bracket
In 2019, the income tax brackets were as follows:
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For the first $47,630 of your taxable income, there is a 15% fee
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On the next $47,629 of taxable income, there is a 20.5% fee. As Silver Hits $95,259
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26% on the next $52,408 of taxable income (on the portion of taxable income above $95,259 up to $147,667) plus
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29% on the next $62,704 of taxable income (on the portion of taxable income above $147,667 up to $210,371) plus
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33% of taxable income above $214,368
More information on tax rates for older years is available on the CRA website.
2020 federal income tax rate and taxable income compared to 2021
A closer look at the 2020 and 2021 tax rates reveals an increase in the income threshold per bracket without a corresponding increase in the percentage per bracket. This increase can be attributed to efforts to keep up with the inflation rate of 1.9 percent. These changes have an effect on your household budgets like housing, food costs, fuel costs, etc., and you need to be sensitive to these changes in your income and expenses.
Tax reduction strategies
There are ways to reduce the amount of your taxes. These strategies reduce tax by reducing your taxable income or the amount of tax owed, not by reducing the tax percentage. This places your taxable income in a lower tax bracket or reduces the tax owed. These strategies include claiming “tax credits” and “tax deductions.”
Tax credits in Canada
A tax credit is an amount of money you are allowed to subtract from the income tax owed. This credit not only reduces your taxable income, but also the amount of tax you owe.
Two main types of credits are non-refundable and refundable.
What are non-refundable tax credits?
Non-refundable tax credits are items that are deducted directly from your tax owed until it equals $0. If the relevant tax credit is greater than the tax due, the additional amount will not be refunded. Popular tax credits include the Retiree Credit, Adoption Fee, Child and Dependent Care Credit, and Mortgage Interest Credits.
Here’s how it works: If you owe a tax bill of $2,400 and you have a non-refundable tax credit on your mortgage interest credit that is $2,750, your taxes will be deducted and reduced to zero, however, you will not receive the additional $350.
What are refundable tax credits in Canada?
Refundable tax credits are credits that are refunded in full, regardless of the amount of tax owed. With these credits, like non-refundable credits, your tax bill is reduced to $0.
Here’s the good part, unlike non-refundable credits, you get the extra amount refunded. Additionally, refundable credits are paid whether or not you owe income tax. These credits include earned income tax, premium tax credits, goods and services tax, and harmonized sales tax (GST/HST).
Here’s how it works: If you owe a $2,400 tax bill and have a refundable tax credit of $2,750, your tax liability will be reduced to zero and you’ll get a $350 refund.
Tax deduction
These are essentially expenses you incur during the year that can be subtracted from your gross income, thereby reducing your taxable income by putting your earnings in a lower tax bracket.
Common deductions include union dues, registered pension plans (RPP), registered retirement savings plans (RRSP), community or charitable donations. Certain government-designed deductions are in place to encourage community participation in development programs.
Here’s how it works: If you earn $60,000 and receive tax deductions of $15,000 from your RPP and community park donations, your taxable income drops to $45,000, putting your tax bill in a lower tax bracket.
Frequently asked questions about the Canadian tax system
1. What is the tax system in Canada?
Canada applies the progressive or progressive rate taxation system.
2. What are the important dates for paying my 2021 tax installments?
Tax installments are due on the 15th quarterly day. This means March 15, June, September and December 15.
3. What are the payment methods for personal income tax?
You can pay your income tax through online banking, by credit card, in person at a Canada Post counter with your personalized voucher and debit cards.
4. How should I complete my tax return?
You can file your tax return by the following methods: by mailing it to your local tax services office, online at NETFILE and on the CRA website.
5. What happens after I file my tax return?
Your tax return will be reviewed to ensure submissions and corrections are correct. To do this, they compare the information you have filed with your employers and financial institutions.
6. How can I obtain my refundable tax credits?
Refundable tax credits will be directly credited to your bank account within 2 weeks (if deposited via NETFILE) and 4-6 weeks (if deposited by mail).
7. What happens if I don’t pay the tax due by the due date?
If the due date falls on a Saturday, Sunday, or a CRA-recognized holiday, you can pay on the next business day. However, if you don’t pay your tax or balance on time, you risk having to pay additional interest each time.
8. What happens if I don’t file my tax return on time?
You will be charged interest from the return due date until the day you file your tax return.
9. Is federal income tax different from provincial income tax?
Yes, federal taxes are different from provincial taxes. Different provinces have different tax rates and brackets. Confirm your province’s rates to be sure and make any necessary payments.
Last words
And there you have it, these are the differences between Canadian taxation of 2020 and 2021. Also in this article, we saw what tax credits are, personal tax brackets, tax questions and answers, tax deductions and tax reduction rates.
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