What is the Effective Tax Rate in Canada? Taxes 101

Taxes can be confusing for the everyday person. As tax laws can sometimes be elusive, it is crucial to keep up with the ever-changing trends in the legal world.

By familiarizing yourself with Canada’s tax rates, you can be sure of the legalities regarding your taxable income. Keep reading to discover what tax brackets are and how you can calculate your tax rate!

What are Tax Brackets?

Before we get into the meat and potatoes, we should make sure that we’re clear on the whole premise of tax brackets.

Tax brackets refer to a range of income subject to an individual income tax rate for residents of Canada. Therefore, as a taxpayer’s income grows, so does their tax rate. Following this growth, a person’s income moves to a higher bracket, which correlates to higher taxes overall.

Tax rates apply to your annual taxable income, but they don’t include deductions. As a result, low-income earners fall under tax brackets with a relatively low tax rate, while brackets with higher rates house those with higher earnings.

There are five tax brackets in Canada on a federal level. However, residents of Canada have provincial tax rates, as well.

Why Should I Care About Tax Brackets?

If you think this knowledge has little bearing on your life, think again!

Canada’s tax system is complex. Therefore, you can save yourself a few headaches by understanding the math behind your payments. Tax brackets outline how much you need to pay in taxes based on your annual income. Other than this, they tell you how much (or how little) you should earn to move up (or down) a bracket.

According to Canada Revenue Agency, your income is taxed progressively, so the tax system is called progressive or graduated. Namely, your earnings are subject to multiple tax rates, not just that in your basic tax bracket. If you don’t know your taxable income, you might be strapped for cash when that bill arrives at your door.

Last but not least, knowing which tax bracket you fall into can significantly help you decide when to claim credits or deductions.

How to Get Into a Lower Tax Bracket?

Canadian tax brackets aren’t set in stone. The CRA adjusts the brackets and income tax rates in Canada depending on inflation and general living expenses. Additionally, you as a taxpayer can improve your tax refund without waiting on the CRA.

Overall, there are two ways you can reduce your taxes – credits and deductions.

What are Tax Credits?

Taxable income in Canada varies dramatically, as it depends on different factors. One such factor is tax credit.

Tax credits are amounts of money that can reduce your overall taxable income. By applying to more tax credits (considering you’re eligible), you have a chance to reduce your income taxes by a sizeable amount. We can distinguish between refundable and non-refundable credit.

One of the most popular types of credit is charitable tax credits. A taxpayer is eligible for this if they donate to a registered charity, thus having the opportunity to claim credit of up to 75% of net income.

What are Tax Deductions?

On the other hand, tax deductions are an amount you can subtract from your taxable income. Deductions are usually everyday expenses that a taxpayer can take away from their gross income.

As an example, the tax rate in Canada can be reduced by removing expenses from being self-employed or enrolled in a traineeship of some sort. Undoubtedly, the possibilities are abundant.

Federal and Provincial Tax Brackets

As mentioned previously, effective tax rates in Canada come from both federal and provincial taxes.

How Much Federal Income Tax do You Need to Pay?

First, let’s look at how much federal tax Canadians needed to pay based on their annual income in 2021. These tax rates apply to residents across Canada, regardless of their province.

Tax Bracket	Tax Rate
$0 – $49,020	15%
$49,020 – $98,040	20.5%
$98,040 – $151,978	26%
$151,978 – $216,511	29%
over $216,511	33%

 

To put this into perspective, we’ll calculate the average tax return a person in Canada has on their annual income.

If you made $50,000 in 2021 from all available sources of income (like work and benefits), you would be sitting in the second-to-lowest tax bracket, with a tax rate of 20.5%. Therefore, you would be paying approximately $10,000 in federal taxes, excluding credits and deductions.

Combined Federal and Provincial Tax Rates

After you have calculated the amount you owe in federal taxes, you need to do the same for provincial ones. Since all provinces in Canada have their own tax brackets, taxpayers need to familiarize themselves with the laws of their territory.

Now we’ll look at some of the income taxes in Canada by province, although we won’t cover all territories.

We’d also like to mention that we will not include Quebec in this list because the province has a separate tax system.

Nova Scotia

Surprisingly, Nova Scotia boasts the highest tax rate in Canada, with 8.79% on the first $29,590 and 21% on all portions over $150,000. Additionally, Nova Scotians pay the highest marginal tax rates of nearly 50% at an income level of $136,270.

British Columbia

Beautiful BC holds the second-highest tax rate, with 5.06% on the first $42,184 and 20,5% on portions over $222,420 in 2021.

Ontario

Ontarians paid a tax rate of 5.05% on the first $45,142 and 13.16% on all portions above $220,000 in 2021.

Alberta

Interestingly enough, the tax rates in Alberta are one of the lowest in all of Canada, with a range of 10% to 15% of income. The combined federal and provincial tax rate ranges from 25% to 48%.

Wrap-Up

We’ve reached the end of our discussion.

Hopefully, this information helped you understand the effective tax rate in Canada and provided you with enough relevant details about federal and provincial tax brackets. Now go and file your taxes accordingly!