Canadian Tax Brackets Explained

If you make money in Canada and file your taxes, you are probably aware of “tax brackets”. To put it simply - you get taxed at different rates depending on your income level and where you live. This is certainly true but a bit of an oversimplification. We sometimes hear people saying things like “I don’t want to make more money because I will jump a tax bracket”. The implication is that "it’s just not worth it” or that they will end up paying ALL of that extra money earned in tax. 

There is a lot of this kind of talk in the business community (erm Facebook) and it’s not accurate. In this blog we will cover how tax brackets work and why limiting your income potential is never a good idea. 

So let's dive in!

 How Tax Brackets Work in Canada: 

Tax brackets are based on your total taxable income. This is income from all sources, less eligible deductions. You are taxed on net income. Net income is income after all eligible deductions. Deductions vary from individual to individual.  They can also grow in complexity if you happen to be a business owner. 

 Once you have claimed all appropriate deductions you have your NET income amount.  This amount can be then used to determine how much tax you will pay (more on that later).

 In Canada, we have 2 types of taxes: Federal and Provincial. In other words you pay tax to the federal government AND to your provincial government. The federal tax rates are the same for all Canadians. Provincial tax rates differ by province or territory.  You can find tax rates published by the CRA HERE.

ARE YOU PREPARED FOR TAX SEASON? DOWNLOAD OUR FREE 2022 TAX GUIDE AND TAKE THE STRESS OUT OF THIS YEAR’S TAX SEASON. 

How to determine what tax bracket you fall under:

To figure out what tax bracket you fall under you will need to figure your net income. Your net income is your gross income minus eligible deductions. Deductions are things like RRSP contributions, write-offs if you are a business owner, and more.  To give you a simple scenario. Let’s say you live in Ontario. Your gross income was $100,000 in the last calendar year. You had $20,000 in eligible deductions and credits bringing your NET income to $80,000. You would use this last amount to begin your calculation. 

“We challenge you to shift your thinking around taxes. Treat them like another business expense that you are budgeting for.”

How to calculate your total tax owing:

Let’s keep going with the above example… stay with us!

Here's how to calculate taxes owing after you have determined your NET income. 

We have $80,000 in NET income for an Ontario resident.  Because our imaginary taxpayer is an Ontario resident, the first $45,142 of the $ 80,000 is taxed at 5.05%. The remaining $34,858 is taxed one bracket up at 9.15%. Adding these two numbers gives you the Provincial tax amount. 

As mentioned earlier federal tax is the same for all Canadians. The federal portion of the tax bill is calculated as follows: 15% on the first $49,020 and the remaining $30,980 at 20.5%. To calculate total tax owing you add the provincial amounts to the federal amounts.  Presto - you’ve got your tax bill for the year. 

SO, as you can see, when we make more money, the tax rate doesn’t increase on ALL of our income, just the portion that ends up in the next tax bracket, if any.

How to reduce your taxable income:

There are lots of ways to ensure you are paying your due in taxes but not overpaying. Let’s go back to: “there is no point in making more money, I’ll just lose it all in tax”. As you can see from the above example this is simply not the case- the more you make the more you keep. Yes, your tax bill is likely to be higher but an increase in revenue in a business can be leveraged to your advantage.  When securing bank financing or selling your business that revenue amount matters. The same applies to individuals getting a mortgage or other financing.

Some tips on making sure you are not leaving money on the table: 

• Make sure you are tracking all your expenses
• Keep receipts to make sure your write-offs can be supported
• Claim home office
• Ask your tax preparer or research tax credits available in your province
• Keep an eye out for new tax credits like the Ontario Staycation Tax Credit 
• Ask your accountant about incorporation 

The bottom line:

We challenge you to shift your thinking around taxes. Treat them like another business expense that you are budgeting for.  Shift your focus from avoiding paying taxes to understanding your taxes and paying only the amount of tax necessary. We offer a supportive approach to help you navigate your own tax planning journey through our financial clarity calls and our course Solopreneur Tax Academy.  Take the time to invest in your learning and you'll set yourself (and your business) up for long term success.

Wishing you success in your business,

- Martina + Ashli

Interested in learning more from us?   Follow along with us through our social media accounts (find us on Instagram @growcpa) and sign up for our newsletter for more educational and fun financial content. 

Date published: February 15, 2022

Disclaimer - The information provided in this blog is general in nature and solely for educational purposes. Readers use and implementation of the information comes at their own risk and is their own responsibility.