Are you doing some tax planning or starting your own business? Whether you are a Canadian resident or a recent newcomer, educating yourself about the income tax rates in Canada is very important in both your personal and professional lives.
As an independent consultant, you must know how much to set aside for taxes. If you are working at a high-paying job, you need to know how much money will come from your salary for taxes. And if you are starting a new business, including taxes in your financial models will show investors that you did your research and know what to expect. No doubt, taxes are important to know about.
However, the income tax rate in Canada is not one set number. So, let’s learn about how income taxes work in Canada and how you can best prepare yourself.
Canada Tax System
First, the Canadian tax system is based on progressive brackets – the more money you make, the more taxes you must pay. These brackets differ between individual and corporate income. Another critical thing to know about Canada’s tax system is its principle of self-assessment – you need to submit your tax return every year and either receive a tax refund or pay additional taxes. Of course, if you hire a professional accountant or tax specialist to file your taxes for you, they will be familiar with the process and save you many hours of research to ensure you do your taxes correctly. Whether you file independently or with a professional, knowing the income tax rates yourself is crucial.
Who charges me for taxes?
When you buy something at the store, you pay a 13% tax on it, a mix of federal and provincial taxes (GST and HST). The same applies to income taxes. There is a federal tax rate (with progressive brackets), and there are separate provincial or territory taxes on top of it, depending on where you live. The tax systems by province and territory are mostly similar and share the same self-reporting principle.
What if I have different types of income?
You may get paid from your full-time job, have investments, and have another stream of passive income flow. These different incomes are taxed at different rates. The four main groups of income are the following:
- General income: employment (tips, commissions), employment benefits (company car, dental care), social benefits, interest, pensions. Your employer must withdraw taxes from your pay and send the amounts to CRA, issuing you a T4 slip once a year with all the information.
- Income from dividends paid to company shareholders: dividends receive a special tax deduction that can lower the tax rate.
- Income from selling shares: includes income from selling a property, where the tax applies to only half of the profit made on the transaction (if your home is your primary residence, it is exempt from tax obligations)
- Self-employment income: you are only taxed on your net income (total income – expenses), so log all of your expenses for accurate record keeping. Please familiarize yourself with self-employment income taxes to know when to send them in.
Federal Tax Rates for Individuals
The first column of the table lists the brackets of individual income, the second column shows the applicable federal tax based on the amount, and the third column is the rate at which tax is incurred with an additional dollar of income (your federal tax rate).
| Taxable Income (from – to) | Marginal Rate on Excess |
|---|---|
| $0 –55,867 | 15.0% |
| $55,867 – 111,733 | 20.5% |
| $111,733 – 173,205 | 26.0% |
| $173,205 – 246,752 | 29.0% |
| Over $246,752 | 33.0% |
“But what if I make $60,000 a year? How much in tax would I pay?” you may ask. This is where the marginal rate of excess comes into play. Here is how you would calculate your total tax to pay for the year:
First $53,359 of $65,000 = pay $8,003.85 in taxes at the rate of 15%.
For the remainder ($65,000-$53,359 =$11,641) = pay 20.5% in tax.
$11,641 *20.5% = $2,386.40 since now you are in the second bracket between $53,359 and 106,717
Provincial and Territorial Income Tax Rates
| Provinces / Territories | Rates for 2024 tax year |
|---|---|
| Ontario | 5.05% on the first $46,226 of taxable income, + 9.15% on the next $51,446 up to $102,894, + 11.16% on $102,894 up to $150,000, + 12.16% on $150,000 up to $220,000, + 13.16 % on the amount over $220,000 |
We highlighted Ontario since that is where Taxory provides accounting services to our clients; however, if you live in a province other than Ontario, you can find the provincial tax rates on the CRA website. These taxes are charged in addition to the federal income taxes, so make sure you add your federal and provincial/territorial marginal tax rates together.
Important Notes about Canada’s Tax System
The Government of Canada also specifies the following:
- “While the tax principle is that all income is treated the same, many exceptions mean that some forms of income can be taxed at a higher or lower rate or even be tax-free.
- A graduated income tax system means that people with a lower income pay a lower tax rate than people with a higher income.
- You pay income tax on your taxable income—your total income minus allowable deductions or exemptions.
- You can calculate your average tax rate, but it will be taxed at your marginal tax rate when you make more income.”
Hopefully, that sheds light on Canada’s tax system and helps you understand how much to pay in income taxes and the Canadian income tax rates. If you need help filing your tax returns, please don’t hesitate to reach out.
Anna Grigoryan is a professional corporate accountant who provides accounting, bookkeeping and tax services to Small Business owners and individuals. She has more than ten years of professional experience in public accounting and a bachelor’s degree in Business Accounting. Anna is the CEO of Taxory, an accounting firm in Toronto area.