Canadian Tax Rates: What Is Canada’s Income Tax Rate?

No matter what country you reside in, taxes are inevitable. They are a necessary part of society and help fund many essential government services and programs. According to the Fraser Institute, the average Canadian family pays 42.5% of their income in taxes yearly. 

The taxes you pay in Canada depend on several factors, including your province or territory of residence, income, and any deductions or credits you may be eligible for. The federal government collects taxes on behalf of all provinces and territories, and the tax rates vary depending on the province or territory in which you reside.

If you are considering moving to Canada, you may wonder how much you will have to pay in taxes. Well, No need to worry; we are here to help you. This guide helps you understand the different types of taxes, tax rates, and tax brackets that apply in Canada, among other things.

So, Join us to explore the details.

What Is a Canadian Income Tax?

Income tax is a tax on the yearly income of individuals, corporations, and other organizations. The amount of tax due depends on your income during the year. Income includes employment income, self-employment income, rental income, and investment income such as interest or dividends.

Taxation in Canada is a federal responsibility, with taxes payable to the government by residents of Canada on income earned within or outside of Canada. Taxes are collected by the Canada Revenue Agency (CRA) under the authority of the Minister of National Revenue.

The federal government sets the rules for Canadian income taxes.  The federal government collects income tax from its residents through the Canada Revenue Agency (CRA).

The federal government also collects a 5% goods and services tax (GST) on most goods and services sold in Canada. The GST rate was increased from 7% to 8% effective July 1, 2010.

The combined federal/provincial personal income tax rate across all provinces ranges from 15% in Quebec to 46% in Nova Scotia (the lowest and highest provincial rates, respectively).

Provincial taxes are generally collected by the province where you reside. If you live in Ontario but work in Quebec, you would pay Ontario taxes on your income and Quebec taxes on your earnings from working in Quebec. However, most provinces use the federal system as their starting point and then add some changes to it.

Every province has its system for collecting payments from residents who earn money within its borders. These payments go toward things like education, health care, and other services provided by provincial governments at all levels of government.

The good news is that many deductions are available to Canadians when filing their taxes yearly. These include moving expenses, student loan interest payments, and charitable donations — all of which can reduce your overall taxable income and how much you owe the government at tax time.

Progressive Income Tax System

The Canadian taxation system is based on a progressive income tax system, meaning higher-income earners pay a higher tax rate than lower-income earners.  The first $47,630 of taxable income is taxed at 15%, then the income above $47,630 is taxed at 20.5%, and finally, any amount over $91,831 is taxed at 33%.

As a result of this progressive tax system, those with lower incomes pay less than those with higher incomes — even though they may have similar net incomes after accounting for deductions and credits.

What Are the Things You Need To Prepare as a Canadian Taxpayer?

The Canada Revenue Agency (CRA) expects you to file a tax return each year if you are a Canadian taxpayer. The CRA says that everyone must file a tax return if they have income from employment or business or an investment income of more than $200.

In addition, the CRA says that even if you don’t have to file a tax return, it is still essential to keep your tax information up-to-date with them so that they can ensure that you are receiving the correct amount of benefits and credits for which you are eligible.

You can’t just approach any accountant or tax professional when filing your taxes, especially if it’s your first time doing so. You need to know some things beforehand to do everything right. Here are some things that Canadians need to prepare as taxpayers:

Residency Status

When preparing for tax season, you must know your residency status to file your taxes correctly. If you have been living in Canada for more than half of the year and are not considered a resident, you will be taxed as a non-resident.

A non-resident taxpayer cannot claim any deductions or credits related to their employment in Canada. Non-residents are also not eligible for the goods and services tax/harmonized sales tax (GST/HST) credit nor the refundable medical expenses supplement.

If you are considered a resident, you will be taxed as a resident, and there will be an additional form on which you will have to report all of your worldwide income, even if it was not earned in Canada.

Social Insurance Number (SIN)

The next thing you need to do when preparing for tax season is to get a SIN (social insurance number). This is a unique 9-digit number assigned by the Canadian government, which identifies each individual so they can receive benefits from the government such as employment insurance (EI), old age security pension (OAS), etc.

You need this number before filing your taxes because certain deductions/benefits are based on it, like EI premiums and RRSP contributions!

T4 Document

If you are an employee working for someone else and you get paid by cheque or direct deposit, then your employer will provide you with a T4 document at the end of each year.

This document has all the details about your income and deductions taken off your salary. It also shows how much tax has been deducted from your paycheque throughout the year. 

Each employer would have a different tax information page if you had multiple jobs during the year. However, if you only work for one company during the year, then there will only be one page for them on your T4 form.

Track all your expenses

You must keep track of all your expenses when preparing to file taxes in Canada because some deductions can be claimed only if they are supported by proof or receipts. For example, suppose you want to claim medical expenses as deductions from your taxable income.

In that case, you must keep all receipts related to those medical expenses (such as doctor visits and tests) during the year. You should also keep track of any charitable donations made throughout the year.

Know the Deadlines

The deadline for filing your tax return depends on your income earned during the year. If you are self-employed or have other income sources such as investments, or rental properties, the deadline is usually April 30th of each year.

However, if you are an employee, you must file your tax return by June 15th unless you use a calendar year as your accounting period (instead of a fiscal one).

What Kind of Taxes Do I Pay in Canada?

The Canadian government collects taxes from its citizens to fund its social programs. The Canadian tax system combines federal, provincial, and municipal taxes. The Canada Revenue Agency (CRA) administers the tax system on behalf of the government.

Canada has a progressive income tax system, which means that people who earn more pay higher taxes. The income level at which you start paying taxes depends on where you live in Canada. The most common taxes are:

Income Tax

Income tax is charged on your taxable income, the total of all the money you earn during a year, less any allowable deductions or credits. Your taxable income is calculated by subtracting your allowances from your total income. Personal allowances are fixed amounts that everyone can claim every year.

The Canada Revenue Agency (CRA) determines how much tax you owe based on a combination of factors, including:

1. How much money do you make 
2. What province or territory do you live in
3. Your marital status
4. Whether or not you have children or dependents living with you under 18 years old at the end of the year. If so, they may qualify for certain tax credits and benefits that can reduce your overall tax bill.

CPP (Canadian pension plan)

The Canada Pension Plan (CPP) is a retirement pension program funded by contributions made by employees, employers, and self-employed individuals. The CPP provides monthly benefits to eligible contributors who retire after contributing for at least ten years.

QPP (Quebec Pension Plan)

The Quebec Pension Plan is similar to CPP, but with some differences. It also pays a monthly pension when you retire and is run by the government of Quebec. QPP contributions are mandatory for employers and employees in Quebec.

Employment Insurance (EI)

EI is another federal program designed to help Canadians find work in times of need. It provides temporary income support to individuals who have lost their jobs through no fault of their own and self-employed people who can’t find work due to factors beyond their control. 

Two types of EI benefits are available: regular and Special. Regular benefits are paid out based on how many hours you worked in the last 12 months before becoming unemployed; special benefits are paid out based on how much money you earned in your last employment.

Tax Credits, Deductions, and Expenses for Canadian Taxpayers

In Canada, there are a variety of tax credits, deductions, and expenses that can help reduce the amount of income tax you owe. Tax credits are nonrefundable and reduce the income tax you owe each year. 

In other words, if your tax liability is less than the amount of your credit, you won’t receive a refund for the difference between what you paid and what you owed.

To claim any of these credits or deductions, you must complete the appropriate forms for each year you wish to claim them. You can find all the forms on the CRA website under Forms and Publications.

The forms have detailed instructions on how to fill them out appropriately. They also list all the supporting documentation that must be attached to ensure no mistakes are made when calculating how much refundable or non-refundable credit is available to you.

Expenses and Tax credits like these may be tax deductible for you:

•  Medical expenses
• Travel Expense 
• Business expenses
• Child Care Expense
• Charitable Donations Tax Credit
• Disability Tax credits
• Pension deductions and credits
• Retirement savings plans

When Can You Submit a Canadian Tax Refund Application?

 Tax refunds in Canada are offered to taxpayers who have paid too much tax during the year. Refunds can be obtained by filing your taxes and requesting a refund. To apply for a tax refund, you must have previously filed a Canadian income tax return.

If you are eligible to get money back from the government, you must file your tax return before the filing deadline (usually April 30th).

However, certain conditions must be met before you can submit your application. If you meet these conditions:

• You may file for a refund from the CRA within ten years from the last day of the tax year. If you filed your 2016 taxes in 2017, you would have until 2025 to submit your application.
• You overpaid your taxes because you did not claim all of your deductions.
• You claimed an incorrect amount on your return line because of an error made by the Canada Revenue Agency (CRA).
• Your business or investment activity has resulted in a loss instead of a profit.
• You received erroneously assessed interest charges or penalties.

How to File a Tax Return in Canada

The Canada Revenue Agency (CRA) is the government agency responsible for collecting taxes and distributing benefits. It’s also responsible for administering the tax system, which includes processing your tax return.

The CRA offers several ways to submit your tax return

• Online
• By Mail

Let’s discuss them in detail

Online

To file your Canadian tax return online, you have three options.

• First, you can use NETFILE. NETFILE allows you to file your return online using NETFILE software. This service is available all year round but is best used during the tax season when there’s less demand for network resources.
• Second, you can file your taxes electronically using EFILE. This means you will send your tax information directly to a tax preparer who submits it on your behalf. You should consider using a professional tax preparer if this is your first time filing taxes or if you need help understanding the forms and instructions.
• If you have already prepared a paper version of your tax return and wish to complete it online, Auto-fill my return is another option. The CRA has developed an application that will automatically fill in most of the information on its website so that it can be submitted electronically without manually entering everything.

However, some data must still be entered manually. Auto-fill does not allow for refunds or credits – If you want a refund or credit from the federal government, you must use NETFILE or EFILE instead of auto-fill my return.

By Mail

If you want to file your tax return by mail, you’ll need to send a paper copy of your return. To do this, you’ll need to fill out the appropriate forms and send them along with your tax returns to the CRA.

Canadian Income Tax Filing Deadline

The deadline for filing your income tax return is usually April 30, which may vary depending on your province or territory. You can file your return online with the Canada Revenue Agency (CRA) or a registered tax preparer, such as a Certified General Accountant (CGA).

If you have self-employed income, you’ll need to file a separate tax return from your employer’s T4. If you’re unsure how much to report, ask your accountant or CRA.

You can request an extension from the CRA by sending them a letter along with their extension application form (T1-OSBC) by April 30. Once approved, your deadline will be extended.

But there are some exceptions: If you owe money to the Canada Revenue Agency (CRA), then your extension will be denied, and you must pay what you owe by April 30. It will also be denied if your requested extension takes more than six months beyond the original date.

Difference Between Tax Credits and Tax Deductions

Tax credits and tax deductions are two ways to lower your tax bill. A tax credit is a dollar-for-dollar reduction in the amount of tax you owe. A deduction reduces the amount of income subject to taxation but doesn’t directly reduce the amount of tax you owe.

Take a look at the functioning of both of them.

Tax Credits 

Tax credits are a unique way of reducing the amount of tax that you have to pay. There are two types of tax credits:  

1. Non-refundable credits
2. Refundable credits

The Canada Revenue Agency (CRA) defines a non-refundable tax credit as a credit that taxpayers cannot receive even if they have no taxes payable. If you have a non-refundable tax credit, you can’t get it back when you file your income tax return, but it can reduce your tax payable for the year.

Non-refundable tax credits are available to all Canadian residents who qualify, regardless of their income level or filing status.

For example, a basic personal amount (exemption) is a non-refundable tax credit that can not be claimed by all taxpayers who qualify, regardless of their income level or filing status. It is calculated at $11,809 in 2019, based on the 2019 federal budget proposal released on February 19th.

Refundable tax credits are similar to rebates because they allow you to receive money back from the government even if you owe no taxes or have paid too much already. You should claim all refundable tax credits that apply to you, regardless of whether or not you will receive a refund at the end of the year.

In most cases, refundable tax credits do not affect your eligibility for other benefits such as OAS/GIS or GST/HST credits.

Tax Deduction

A tax deduction is an expense you can subtract from your gross income to arrive at your taxable income. You can deduct specific amounts from your gross income to determine your taxable income. These are called “allowable deductions.” 

If you have allowable deductions, they will be identified in the Income Tax Act (ITA) and reduce the amount of tax you must pay on your income.

Deductions include expenses for certain business-related travel and entertainment, moving costs, charitable contributions, and medical expenses.

For instance, if your taxable income is 80,000 C$, but you also paid $10,000 C$ for charitable contributions and medical costs, your taxable income would be 80000 C$ – $10,000 = 70% C$, and you would be required to pay tax on this sum.

Check Out These Easy Examples of How Tax Works in Canada:

Differentiating Marginal Tax Rate and Average Tax Rate

In Canada, there are two ways that the government collects taxes: a marginal tax rate and an average tax rate.

The average tax rate is calculated by dividing the total taxes paid by an individual in a year by their total income. It helps compare taxes across different income ranges and roughly approximates what the average person pays.

The average tax rate in Canada is around 23.9%. This means that for every $100 you earn, $24 will be paid to the government.

The marginal tax rate is the percentage of an additional dollar earned that will be taxed. It represents the highest amount of tax paid on each dollar earned above a certain level, usually, 80 percent of the next dollar earned.

For example, If you earn $100 and pay $10 in taxes, your marginal tax rate is 10%. This means that the next dollar you earn will also be taxed at 10%, so if you were to earn $110, you would pay $11 in taxes for a total of $21—and so on.

Your overall marginal tax rate is determined by the sum of the rates applied at the federal and provincial levels.

 If you live in Ontario, you earn 90000 CAD, then you have to pay the Federal Tax Rate of 20.5 % (that is, between 48,535 CAD and 97,069 CAD ) and the Provincial Tax Rate of 11.16 % (that is, between 89,483 CAD and 150,000 CAD). Put another way, your effective marginal tax rate for the year will be about 31.66%.

The marginal tax rate can also represent the amount of tax paid on the increase in pay for an employee who has reached a maximum salary threshold within their company’s compensation structure. This can occur when employees reach maximum overtime hours or a base salary cap.

What Is the CPP and How Does It Work?

The Canada Pension Plan (CPP) is a compulsory pension plan that you and your employer pay into. It’s designed to replace part of your income if you can’t work due to retirement, disability or death. The CPP pays out a monthly pension to eligible contributors when they retire, become disabled or die.

The federal government runs the CPP, but it’s managed by an independent organization called the Canada Pension Plan Investment Board (CPPIB). The CPPIB invests the money collected from Canadians through CPP premiums, and returns on those investments are used to pay benefits to retired contributors.

In addition, the CPP retirement benefit is designed to replace approximately 25% of an individual’s earnings at their retirement, up to a maximum annual amount.

You will receive a pension when you retire, depending on your average lifetime earnings. To calculate your pension, multiply your average earnings by the years you contributed to the Canada Pension Plan (40 years).

You can start receiving your pension as early as 60; however, the longer you wait to claim it, the larger it will be. There are two distinct categories of CPP benefits, which are as follows:

Retirement pension – You receive this payment when you reach age 65 or have an approved reduction in employment earnings due to a disability or illness.

Survivor’s pension – You may receive this payment if you are eligible and have not reached age 65 by the date of death of your spouse or common-law partner who was eligible for an old age security pension at the time of death.

FAQs

Final Thoughts

Taxes are a common phenomenon for citizens of any country. The tax system in Canada is a bit mixed, and the rates vary depending on the province, city, and even region. As per law, an individual is required to declare income earned from various sources and pay taxes.

Furthermore, There are some things you should know about the tax system that will help you make sure you’re paying what you owe and not overpaying. With all this information, you can confidently handle your taxes properly!

This guide aims to explain federal income tax and how it works in Canada. Hopefully, this guide will also help you get to know some of the tax savings ideas you can use to plan your taxes better and save on taxes, as we all know that there are many other ways to pay less on taxes.