Canadian Tax Brackets

It determines how much personal income tax must be paid each year

Author: Josh Pupkin
Josh Pupkin
Josh Pupkin
Private Equity | Investment Banking

Josh has extensive experience private equity, business development, and investment banking. Josh started his career working as an investment banking analyst for Barclays before transitioning to a private equity role Neuberger Berman. Currently, Josh is an Associate in the Strategic Finance Group of Accordion Partners, a management consulting firm which advises on, executes, and implements value creation initiatives and 100 day plans for Private Equity-backed companies and their financial sponsors.

Josh graduated Magna Cum Laude from the University of Maryland, College Park with a Bachelor of Science in Finance and is currently an MBA candidate at Duke University Fuqua School of Business with a concentration in Corporate Strategy.

Reviewed By: Christopher Haynes
Christopher Haynes
Christopher Haynes
Asset Management | Investment Banking

Chris currently works as an investment associate with Ascension Ventures, a strategic healthcare venture fund that invests on behalf of thirteen of the nation's leading health systems with $88 billion in combined operating revenue. Previously, Chris served as an investment analyst with New Holland Capital, a hedge fund-of-funds asset management firm with $20 billion under management, and as an investment banking analyst in SunTrust Robinson Humphrey's Financial Sponsor Group.

Chris graduated Magna Cum Laude from the University of Florida with a Bachelor of Arts in Economics and earned a Master of Finance (MSF) from the Olin School of Business at Washington University in St. Louis.

Last Updated:November 11, 2023

What Are Canadian Tax Brackets?

The Canada Revenue Agency establishes tax brackets to determine how much personal income tax must be paid each year. Tax brackets, commonly known as tax rates, apply to personal income generated between the minimum and maximum amounts.

The amount of tax a person pays is determined by his income. Therefore, the more you earn, the higher your tax bill will be. A progressive tax system is one in which low-income taxpayers pay a lower tax rate than high-income earners.

In this article, we will understand how Canada's income tax brackets work, the difference between tax credits and tax deductions, and the advantages/ disadvantages of tax brackets.

Understanding Canadian Tax Brackets

A tax bracket is a range of earnings subject to a specific tax rate. Using tax brackets results in a progressive tax system, in which taxation rises with an individual's income. As a result, low-income incomes are taxed at lower rates, and higher-income earners are taxed at higher rates.

Canada has a progressive income tax system. When income is really low, it will not apply to you, but for others, the final dollar they earn during the year gets taxed at a higher rate than the first.

The various rates are divided into tax brackets, each covering a specific income range. Each year, the brackets are recalculated to adjust for inflation. 

For example, a federal tax rate: is 15% on the first $48,535 of taxable income, then 20.5% above $48,535 to $97,069.

Many Canadians believe they pay more in income taxes than their American counterparts. Politicians have used this argument in Parliament to advocate for lower taxes.

In addition to federal income tax, they must pay provincial income tax in the province where they reside.

The reason behind the existence of federal and provincial tax rates is that there are separate stages of government, each with its own set of financial obligations and funding sources. 

For example, the Ontario Health Insurance Plan (OHIP) and B.C.'s Medical Services Plan (MSP) are run at the provincial level. Still, the Canadian Armed Forces and the RCMP cover the military and national security at the federal level.

If a person is considered a salaried employee, his employer is responsible for deducting a specified percentage of that employee's income for tax purposes. However, several circumstances can result in you paying additional income tax.

The amount deducted and remitted to the CRA on your behalf should be very close to the total amount of income tax payable at the end of the year. A refund can be eligible if the CRA has collected too much income tax after you have reported all of your tax credits and deductions.

The following steps will show you an example of a person's taxable income was $50,000 in 2021 and will calculate federal tax as follows:

  • Pay 15% on the amount up to $49,020, or $7,353.00

  • Pay 20.5% on the amount between $49,020 to $98,040, or $200.90

  • Total federal tax payable: $7,553.90

Tax Credits vs. Tax Deductions

The tax credits and deductions can be used to lower the amount of income tax you pay. Both are beneficial, but they are not the same. Also, credits and deductions are two typical strategies to lower the tax bill or increase a tax refund. 

These two tax credits reduce the tax liability directly, but tax deductions reduce taxable income. A $1,000 tax credit, for example, can reduce the tax bill by $1,000. However, A tax deduction of $1,000 can lower the taxable income you owe by $1,000. 

So, a $1,000 deduction would save you $220 if you are in the 22 % tax bracket.

The following is a detailed explanation of how tax credits and deductions operate:

Tax Credits 

A tax credit is an amount that taxpayers can deduct from the taxes they owe, despite deductions, which reduce the amount of taxable income rather than tax credits lower the actual amount of tax owed.

The credit's nature determines a tax credit's value; many tax credits are only available to individuals or businesses in specific localities, classifications, or industries.

Tax credits lower tax liabilities dollar for dollar; that is why people are preferable to tax deductions. While a deduction decreases an individual's final tax liability, it only does so within their marginal tax rate.  

For example, if we say that an individual in a 22% tax bracket will save $0.22 for every dollar of marginal tax deducted, a person in the 22% tax band would save $0.22. On the other hand, a credit would lower the tax payment by the full $1.

Usually, tax credits are offered at the federal and provincial levels, and there are three kinds:

  • Non-refundable

  • Refundable

  • Partially refundable

Non-refundable tax credits

The non-refundable tax credit lowers the amount of money the person owes. This means that a tax credit can reduce the tax you owe to zero, but it can't provide you with a refund. Again, the personal exemption amount is possibly the best example.

Nonrefundable tax is only valid for the year in which they are claimed, and they expire once the return is filed, and it cannot be rolled over to future years. As a result, it can have a negative impact on low-income taxpayers since they are unable to use the total amount of the credit.

In 2020, it was set at $13,229; when this amount is multiplied by the lowest federal income tax rate of 15%, you will pay no income tax on the first $13,229 of income you make. Low-income and part-time employees will benefit from this, and they may not have to pay income tax.

However, the difference between the credit and the amount of income tax you paid will not be reimbursed if the credit is greater than the amount of income tax you paid.

Refundable tax credits

In the meantime, refundable tax credits can be paid to anyone who qualifies. In addition, the quarterly GST/HST benefit is a refundable tax credit. Normally, the person gets a payout every three months as a refund on the GST paid on goods and services throughout the year. 

Furthermore, this type is available to Canadians with low to modest incomes. As a result, the taxpayer is granted a refund if the refundable tax credit decreases the tax liability to less than zero

Refundable tax credits are the most advantageous because they are paid in full, which means that a taxpayer is allowed the total amount of the credit, regardless of their income or tax liability. 

In addition, the earned income tax credit EITC is likely the most popular refundable tax credit as of the 2021 tax year. The EITC is for low- to moderate-income taxpayers working for a company or self-employed individuals who meet specific income and family size requirements. 

The premium tax credit, which helps individuals and families afford the cost of premiums for health insurance acquired through the health insurance marketplace, is another refundable tax credit. 

Partially refundable tax credits

One example is that some tax credits are only partially refundable, such as the American Opportunity Tax Credit AOTC for post-secondary education students. However, the remaining credit can be refundable if taxpayers reduce their tax burden to zero before using all of the $2,500 tax deductions.

Another example is the child tax credit, which became refundable in 2018 due to the Tax Cuts and Jobs Act TCJA (up to $1,400 per qualified child). In addition, this credit was raised and made completely refundable for tax years 2020-2021.

Tax Deductions

Income tax deductions reduce your taxable income rather than lowering the amount of tax owed. Contributions to a registered retirement savings plan RRSP and charity donations are two of the most well-known tax deductions. 

For example, if a person’s taxable income is $60,000 but contributes $5000 to RRSP during the year, his taxable income is lowered to $55,000. Your taxable income is cut even further if you also donate $2500 to your preferred charity.

Individuals can choose to itemize their deductions or take the standard deduction, which is doubled under the Tax Cuts and Jobs Act. The following is a list of the normal deduction amounts for the tax years 2021 and 2022:

Standard Deduction for the 2021 and 2022 Tax Years
Filing Status 2021 Standard Deduction 2022 Standard Deduction
Single $12,550 $12,950
Married Filing Separately $12,550 $12,950
Heads of Household $18,800 $19,400
Married Filing Jointly $25,100 $25,900
Surviving Spouses $25,100 $25,900

The following are some of the most frequent tax deductions that you can claim on your federal tax return:

  1. Interest on student loans up to $2,500.

  2. Contributions up to yearly limits to a standard individual retirement account IRA.

  3. State and local taxes of up to $10,000.

  4. Contributions to a health savings account, up to a certain amount per year.

  5. Medical and dental costs that exceed 7.5 % of adjusted gross income. 

  6. Self-employment expenses include the deduction for a home office and the deduction for health insurance premiums.

  7. Charitable donations. 

  8. Losses on investments.

  9. Losses from gambling.

In addition, itemizing helps to take advantage of deducting things like house mortgage interest, medical costs, and charitable contributions. If a person's itemized deductions exceed the standard deduction, he should itemize to save money on taxes. 

Choosing between the standard deduction and itemized deductions is a binary choice. You can only accomplish one of these things at a time.

Receiving certain deductions, like taking tax credits, requires meeting certain conditions based on your filing status, current life events, and the amount of your income that is taxable. To qualify for tax credits and deductions, ensure you meet IRS requirements.

Pros and Cons of Tax Brackets

Those who oppose a progressive tax hierarchy are more likely to pay higher taxes if one is implemented. Individuals with higher incomes and wealth must pay higher taxes than those with lower incomes under a progressive tax regime.

Many people argue about the progressive tax system; some think it has advantages on different sides, but others do not. Of course, wealthier and higher salaries are more likely to oppose such a policy, but this is not always the case.

The wealthy pay much in terms of money that goes towards running the government. Still, they have very little say because so few of them are putting representatives into Congress or the body of government that sets policy in their respective countries.

There are many arguments around this policy. The first is because it categorizes people into unequal groups. It is also viewed as an unequal representation of a nation's citizens. Only a few people are extraordinarily wealthy.

The majority of Canadian people who have the power to put representatives in government are from the middle or lower economic classes. Usually, wealthy people spend a lot of money running the government, but a few of them are representatives of Congress.

Taxes are complicated and never black and white for any other government policy that affects fiscal policy. Wealthier people discover ways to avoid paying more than the government intends, resulting in less money going to projects that can improve the country.

According to tax brackets and progressive tax systems, individuals with high salaries are better able to pay income taxes while maintaining a reasonably high quality of living. However, low-income people who struggle to meet their fundamental requirements should be taxed less.

Supporters argue that by allowing taxpayers to reduce their tax burden through modifications such as tax deductions or tax credits for outlays such as charitable contributions, this system can create more significant revenues for governments while still being fair.

The additional money realized by taxpayers can then be re-invested in the economy, which can be considered an advantage for the country. Also, tax brackets have an automatic stabilizing impact on an individual's after-tax income, as a fall in funds is offset by a decrease in the tax rate.

Some opponents of tax brackets and progressive tax schedules argue that under the law, everyone is equal regardless of money or economic status and that there should be no distinction between rich and poor.

They also point out that progressive taxation can result in a significant disparity between the amount of tax paid by the wealthy and the quantity of government representation they obtain. Some argue that citizens only have one vote per person, regardless of how much tax they pay. 

Opponents further argue that increased taxation at higher income levels leads to the wealthy spending money to exploit tax law loopholes and discover creative ways to disguise profits and assets, resulting in their paying less in taxes than the less well-off.

In the end, by denying the government revenue, some American and Canadian corporations believe or assume that they have shifted their headquarters abroad to avoid or minimize corporate taxes in their countries.

Researched & Authored by Naden

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