The Canadian Revenue Agency (CRA) operates taxation on a marginal tax rate system, which involves grouping income into “Tax Brackets”. The income tax rates may vary according to the amount you earn. These rates are applied to different portions of your income.
Income taxes are levied on the personal income of individual residents of Canada and individual non-residents who earn certain Canadian-source income. One of the perks of the Canadian tax system is that it operates on a progressive system, which means that those who earn more pay more in taxes and vice-versa.
However, as a Canadian you are, legally, required to pay both federal income taxes and provincial taxes to the province you reside in. The CRA revises income tax rates, periodically, but maintains accessible copies of previous rates on its website.
Let’s take a look at the current taxable income and federal income tax brackets for 2023, shall we?
What Are The Personal Income Tax Rates In Canada?
Federal Income tax rates for 2021 are:
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The first taxable income of $48,535 will attract a 15% fee plus
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20.5% when the next income of $48,534 adds up to a total of $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 over $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 over $150,473 up to $214,368) plus
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33% of taxable income over $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 by the CRA.
They, generally, include your salaries, wages, tips, bonuses, etc. Having a good understanding of where your income falls within the tax brackets will enable you to plan the timing and method of claiming deductions and credits.
How Does Canada’s Tax Brackets Work?
Firstly, it is important to understand the effects of extra income like a side-job or part-time gigs on your taxable income. This helps you have a full grasp on what percentage you’re required to pay as tax.
If your taxable income (after claiming deductions and credits) falls below the $48,535 threshold, you will be required to pay a 15% tax on it. This means that if my taxable income is $35,500, I will be required to pay $5,325 as my income tax.
However, if your taxable income is about $200,000, you will be required to pay varying percentages on different portions of the income.
Let’s take for example 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, which results in a tax bill of $7280.25 plus
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20.5% on the next $48,534, which results in a tax bill of $9,949.47 plus
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26% on the following $53,404, which results in a tax bill of $13,885.04 plus
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29% on the rest ($55,177), which results in a tax bill of $16,001.33
This brings my total tax bill to a sum of $47,116.09.
The final bracket is applicable to you if you earn above $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, therefore you should also check out the tax rates for your specific province to determine your provincial tax.
A Sneak Peek At The 2019’s Tax Bracket
As of 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% charge
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On the next $47,629 of the taxable income, there is a 20.5% charge. As the money rolls over to $95,259
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26% on the next $52,408 of taxable income (on the portion of taxable income over $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 over $147,667 up to $210,371) plus
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33% of taxable income over $214,368
Further information on tax rates for older years can be accessed on the CRA website.
2020 Versus 2021 Federal Income Tax Rates and Taxable Income
A thorough look through the 2020 and 2021 tax rates reveals an increase in the threshold income per bracket with no corresponding increase in the percentage per bracket. This increment can be attributed to an effort to keep up with the 1.9 percent rate of inflation. These changes have an effect on your household budgets like housing, food costs, fuels etc, and you should be sensitive to these changes in your income and expenditures.
Tax Reduction Strategies
There are ways to reduce the amount of tax you pay. These strategies reduce tax by reducing your taxable income or amount of tax owed and not by reducing the percentage of tax. This makes your taxable income fall within a lower tax bracket or reduces the due tax. These strategies include claiming “Tax credits” and “Tax deductions”.
Tax Credits In Canada
A tax credit is an amount of money that you are permitted to subtract from the owed income tax. This credit doesn’t just reduce your taxable income but the amount of tax you owe.
Two major 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 due tax until it equal $0. If the tax credit involved is greater than the tax owed, there will be no refund of the extra amount. Popular tax credits include credit to pensioners, adoption expenses, child and dependent care credit and mortgage interest credits.
Here’s how it works, if you owe $2400 tax bill and you have a non-refundable tax credit from your mortgage interest credit that amounts to $2750, your taxes will be deducted and reduced to zero, however, you will not be paid the extra $350.
What Are Refundable Tax Credits In Canada?
Refundable tax credits are credits that get paid out in full, irrespective of the amount of tax owed. With these credits, like non-refundable credits, your tax bill gets reduced to $0.
Here comes the good part, unlike non-refundable credits, you get the refund of the extra amount. Also, 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 $2400 tax bill and have a refundable tax credit of $2750, your tax liability will be reduced to zero and you will get a refund of $350.
Tax Deduction
These are, basically, expenses that you incur over the year and can be subtracted from your gross income, thereby reducing your taxable income by putting your income within a lower tax bracket.
Common deductions include union fees, Registered Pension Plan (RPP), Registered Retirement Savings Plan (RRSP), community or charity donations. Some government designed deductions are in place to encourage community participation in developmental programs.
Here’s how it works, if you earn $60,000 and you have tax deductions amounting to $15,000 from your RPP and donations to the community park, your taxable income reduces to $45,000 which puts your tax bill in a lower tax bracket.
Frequently Asked Questions On The Canadian Taxation System
1. What is the taxation system in Canada?
Canada operates the progressive or graduated rate system of taxation.
2. What are the important dates to pay my 2021 tax installments?
The tax installments are to be paid on the 15th day, quarterly. This means the 15th of March, June, September and December.
3. What are the payment methods for individual income tax?
You can make payments for your income tax through online banking, credit cards, in person at a Canada Post outlet with your personalized voucher and debit cards.
4. How do I file my tax return?
You can file your tax return through the following methods – mailing it through your local tax services office, online at NETFILE and through the CRA website.
5. What happens after I file my tax return?
Your tax return will be reviewed to ensure that the submissions and corrections are correct. They do this by comparing the information you’ve filed with your employers and financial institutions
6. How do I get my refundable tax credits?
Refundable tax credits will be directly credited into your bank account within 2 weeks (if filed through NETFILE) and 4 – 6weeks (if filed by mail).
7. What happens if I don’t pay my owed tax by the due date?
If the due date falls on Saturday, Sunday or CRA recognized holiday, you may pay on the following business day. However, if you fail to pay your tax or balance on time, you risk being charged additional interests per time.
8. What happens if I don’t file my tax return on time?
You will be charged interests starting from the filing due date till the day you file your tax return.
9. Does the Federal income tax differ from provincial tax?
Yes, federal taxes are different from provincial taxes. Different provinces have different tax rates and brackets. Confirm the rates for your province to be sure and make necessary payments.
Final Words
There you go, those were the differences between 2020 and 2021 Canadian Taxation. Also in this article, we saw what Tax Credits are, Personal Tax Brackets, Q&A’s about taxes, Tax Deduction and Tax reduction rates.
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