With automated software calculating our income taxes, many Canadian taxpayers don’t pay attention to how income tax brackets work. For all you know, you could be paying more taxes than necessary because you are not fully aware of what you’re being taxed for.
If you’re a Canadian taxpayer who has been struggling with the idea of taxation, here’s a quick refresher on what income tax brackets are and what they mean for you. Consider this an overview of the tax brackets in Canada that you should know about and how to calculate your own taxes accurately.
What Are The Income Tax Brackets In Canada?
Both federal and provincial taxes are calculated based on your taxable income. The taxable income is the lowest amount you make for which you will be taxed according to the tax bracket.
Your income tax depends on your annual taxable income and is categorized under 5 brackets, as outlined below:
| Tax Bracket | Annual Taxable Income | Tax Rate | Maximum Tax Paid |
| Initial $49,020 | $49,020 | 15% | $7,353 |
| Next $49,020 | $49,020 to $98,040 | 20.5% | $10,049 |
| Next $53,939 | $98.040 to $151,978 | 26% | $14,024 |
| Next $64,533 | $151,978 to $216,511 | 29% | $18,714 |
| Beyond $216,511 | $216,511 and beyond | 33% | Varies |
Keep in mind though, there are several factors that need to be taken into consideration when calculating your taxable income, such as Basic Personal Amount or tax credits.
Further, If your income is made up of employment and/or business or capital gains, a different method of calculating the federal tax applies. This method will take into account all relevant deductions and credits that can significantly lower the tax amount.
What Is The Basic Personal Amount?
The Basic Personal Amount (BPA) is a non-refundable tax credit that every Canadian citizen is entitled to. It is essentially tax-free income of a fixed amount, as established by the Canadian government, that you can earn for an entire year before any taxes are due.
For example, if the BPA for 2020 was $13,229 and you earned $40,000 that year, then you will only pay taxes on $26,771 ($40,000 − $13,229).
The BPA can be claimed on your tax form to further reduce your taxable income. In 2023, the BPA should be amended to reach up to $15,000 for each individual.
How To Determine Your Annual Taxable Income
As mentioned above, there are several factors that can affect your income tax bracket. Let’s take a closer look at them:
1. Calculating Net Income Taxable Income
Your taxable income is the amount of money you earned during a year minus all applicable deductions and credits. The annual taxable income can be calculated using the following formula:
Gross Employment Income − Employment Expenses = Taxable Income
Let’s say your gross employment income in 2018 was $50,000 and your employment expenses amounted to $2,000.
Taxable income: $50,000 − $2,000 = $48,000
2. How To Calculate Taxable Income Above BPA
Your taxable income is the amount left over after subtracting the Basic Personal Amount from your gross employment income. Therefore, you can calculate your annual taxable income above the BPA by using the following formula:
Taxable Income = Gross Employment Income − Basic Personal Amount
So if you earned $85,000 in 2020, your federal taxes would be calculated using the tax brackets below.
Taxable income: $85,000 − $13,229 = $71,771
3. Tax Credits
Tax credits are refundable tax credits that can significantly reduce the amount of taxes you pay. Most tax credits are income-based. This means you’ll get less or no credit if your income is lower than the thresholds set by the government.
However, some tax credits like the Child Tax Credit are not income-based.
4. Deductions & Adjustments
Deductions are expenses that you can claim on your income tax. They include things like employment expenses, moving expenses, child care expenses, etc. Adjustments are not an expense but they do directly affect your taxable income for the year you are claiming them.
Similar to tax credits, deductions and adjustments are also applicable only to certain taxpayers under certain conditions.
Final Thoughts
It’s imperative that you learn more about your tax brackets and what applies to your situation to make the most out of it.
Even though tax filing can be complicated, it doesn’t mean that you should avoid doing it yourself. It’s always advisable to at least try and file taxes on your own even if things don’t turn outright. But if you want to ensure that you get the most accurate taxes possible, we recommend hiring a professional when filing taxes.
