A zero-stress look at the federal and provincial tax system.
If you want to avoid big surprises during tax season, knowing your tax bracket is a good place to start. Here’s a step-by-step guide to how you’re taxed provincially – and a few ways to maximize your refund.
How does the federal tax system work?
Canada has a progressive tax system, meaning the more you make, the more you pay. As your income goes up, so does your tax bracket and corresponding tax rate (the percentage of income you pay in tax). The tax you pay for every additional dollar of income you earn is called your marginal tax rate.
In other words, being in a certain tax bracket doesn’t mean you pay that bracket’s tax rate on your entire taxable income; instead, everyone starts at the first tier and moves through each additional tier as their income “spills” over.
Basically, it works like a ladder, and the tax rate at each tier only applies to the earnings that fall within it.
Here are Canada’s federal tax brackets for the 2021 tax year. It’s worth noting that tax brackets can change each year based on inflation.
Let’s look at an example.
Say you made $90,000 in taxable income in 2021. That means you fall in the second tax bracket and will pay 15% on the first $49,020, plus 20.5% on the remaining $40,980.
That’s just federally! Taxes are also collected provincially according to their own tax brackets. The combined provincial and federal tax brackets determine your marginal tax rate. For example, if your income was $49,020, your combined marginal tax rate (provincial and federal) in Alberta for the next dollar earned would be 30.5% (20.5% - federal, 10% - provincial).
Stick with us – we’re diving into provincial taxes in just a moment. The takeaway here is that you can use your combined federal and provincial marginal tax rate to calculate the total amount of tax you’ll owe.
Now, what about provincial tax brackets?
The Canada Revenue Agency (CRA) oversees both federal and provincial taxes (except Quebec). Each province has its own income tax rates because each province has unique financial responsibilities and priorities.
If you’ve recently moved provinces, keep in mind that your tax rates are based on the province you lived in as of December 31st – the end of the tax year.
British Columbia Tax Brackets
Depending on your income, you might find B.C. an ideal province to live in or an expensive one from a tax perspective. If you made less than $42,184 in 2021, then your tax rate would be 5% in B.C. — one of the lowest rates in the country. But if you’re a high-income earner, your wallet might hurt come tax season because B.C. has some of the highest provincial tax rates on the top brackets.
Ontario Tax Brackets
Fun fact: Ontario has the second highest top marginal tax rate in Canada (Nova Scotia is first, B.C. is third and Alberta is ninth).
On average, this province’s tax rates are similar to B.C.’s.
Alberta Tax Brackets
If you’re an Albertan, consider yourself blessed because Alberta doesn’t have a sales tax, payroll tax, or health premium. Even better, Alberta’s basic personal amount (a non-refundable tax credit that can be claimed by anyone regardless of income) is the highest in Canada at $19,369. This means that Albertans can earn up to $19,369 before they have to pay provincial income tax.
Albertans can also earn up to $131,220 and remain in the lowest provincial tax bracket with a 10% tax rate. For comparison, the lowest tax brackets in British Columbia and Ontario are $42,184 and $45,142 respectively.
How do you calculate your taxes?
- Determine your taxable income by adding all your income streams from the year together (like employment, registered savings plans, investments, etc.) and subtracting any deductions.
- Check which bracket you belong in, and use your marginal tax rate to calculate the amount you owe in taxes.
- Subtract any tax credits (like the basic personal amount we mentioned earlier) from your tax payable.
You can use an online tax calculator to make things easy, but we’ll show you the old-fashioned way so you can understand how it works.
Let's go through an example together.
Let’s say you live in Alberta and made $80,000 in employment income, $1,500 in interest income and $1,500 in capital gains (because you’re a savvy investor).
Since they’re taxed at the same rate, combine your employment income and interest income for a total of $81,500.
Now, let’s look at the combined marginal tax rates for Alberta.
Remember, you don’t simply find the tax bracket in the chart above where your total income fits in – you’d end up paying more taxes than you need to. You only pay the higher rate of tax on each additional dollar you earn as you move up the ladder.
Start at the first bracket:
- $49,020 x 25% = $12,255
Now, you still have $32,480 of income to tax within the second bracket:
- $32,480 x 30.5% = $9,906.40
Add these together for a tax payable of $22,161.40.
We’re not done yet! You had $1,500 in capital gains. It’s worth mentioning that only 50% of capital gains are taxable – for the sake of our example, let’s say this calculation has already been done. Capital gains add another level of complexity to your taxes, but don’t stress; our blog on taxing capital gains will tell you everything you need to know.
Today, we’re keeping it simple:
- $1,500 x 12.5% = $187.50
Add everything up for total tax payable:
- $22,161.40 + $187.50 = $22,348.90
The last step is to subtract the basic personal amount (federal and provincial) from your tax payable. First, you have to multiply the basic personal tax credit by that year’s lowest tax rate to arrive at the amount you’re allowed to claim.
The federal basic personal amount for 2021 is $13,808 – you can claim 15%.
- $13,808 x 15% = 2,071
Alberta’s basic personal amount for 2021 is $19,369 – you can claim 10%.
- $19,369 x 10% = 1,936.90
Now, subtract this amount from your tax payable:
- $22,161.40 - (2,071 + 1,936.90) = 18,153.50
You can also calculate your average tax rate:
- Total tax payable/total income = average tax rate
- $18,153.50 / $83,000 = 21.87%
This is waaaay better than paying a 30.50% tax rate (the highest bracket you were taxed in) on your entire income.
How can I reduce my taxes?
The easiest way to reduce your tax rate is to make less money. But who wants to do that?
You can also seek alternative income streams that are taxed at lower rates like capital gains and dividends – or you can maximize deductions and credits.
Tax deductions reduce your taxable income, which is ideal because the lower your income, the less tax you pay. Common tax deductions include RRSP contributions, capital losses, moving expenses, and more.
Tax credits reduce your tax payable (but won’t change your tax bracket). They are either non-refundable or refundable. Non-refundable tax credits can reduce your tax payable to zero, while refundable credits can reduce your tax payable below zero – meaning the government owes you money. Nice, right? Many of these tax credits are available both federally and provincially.
Federal non-refundable tax credits
- The basic personal amount — the most common non-refundable tax credit, which anyone can claim both federally and provincially
- Spouse or common-law partner amount
- The federal age amount for those over 65
- Disability amounts
- Medical expenses
- Charitable donations
Federal refundable tax credits
- The GST/HST credit, which almost everyone is eligible for
- The Climate Action Incentive (CAI) credit if you’re a resident of Saskatchewan, Manitoba, Ontario, or Alberta
- Canada workers benefit for low income individuals in the workforce
- Refundable medical expenses
Provincial Tax Credits
Alberta Tax Credits
British Columbia Tax Credits
Ontario Tax Credits
In Ontario, there are some unique refundable tax credits including the Ontario Trillium Benefit, the Ontario Child Care Tax Credit, and the Ontario Jobs Training Tax Credit. You can find all of Ontario’s tax credits here.
These credits change every year so make sure you’re checking annually to see if there are any new ways to reduce your tax payable.
By determining what tax bracket you’re in, you can better anticipate whether you will get a tax refund or owe taxes in April. That way, you can budget your expenses accordingly to reduce tax season stress and improve your financial decision-making for next year.
Financial planning isn’t just for the rich — anyone and everyone can benefit from it. But remember, it’s always best to consult a professional.