3.2 Personal Income Tax
You have just filled out your income tax return, where you see that your total payable for the year is more than $5,000. You are glad you do not have to pay this lump sum all at once! Instead, almost all of it has actually been paid already: Your employer has made regular deductions from each paycheque to cover your federal and provincial taxes.
In Canada, businesses are taxed differently than individuals and there are many nuances and complexities to address. For these reasons, this textbook does not cover business taxes, which require a course in corporate taxes.
For individuals, taxes are relatively straightforward. This section of the book uses the 2020 tax year federal and provincial/territorial personal income tax brackets to calculate the amount of these taxes that are ultimately deducted from your gross earnings. You can find current-year tax brackets at https://www.canada.ca/en/financial-consumer-agency/services/financial-toolkit/taxes/taxes-2.html.
Federal and Provincial/Territorial Tax Brackets and Tax Rates
Personal income tax is a tax on gross earnings levied by both the federal and provincial/territorial governments. All of Canada uses a progressive tax system in which the tax rate increases as the amount of income increases; however, the increased tax rates apply only to income amounts above minimum thresholds. Thus, higher income earners pay higher marginal tax rates than lower income earners. The format is similar to a graduated commission structure.
The federal and provincial/territorial governments offer a basic personal amount, which is the amount of income for which the wage earner is granted a tax credit. In other words, it is tax-free income. This is designed to help low-income earners in Canada. The basic personal tax credit is calculated by applying the lowest tax bracket rate to the basic personal amount.*
Tax brackets and the basic personal amounts are adjusted annually federally and in most provinces and territories to reflect increases in the cost of living, as measured by the consumer price index (CPI). Other deductions from the gross income may also apply when determining the taxable income, depending on different provincial and federal income tax policies, which change over time.
2020 Provincial Income Tax Brackets (source: Government of Canada)
| British Columbia
(basic personal amount: $10,949) |
Alberta
(basic personal amount: $19,369) |
Saskatchewan
(basic personal amount: $16,065) |
|||
|---|---|---|---|---|---|
| Taxable Income | Tax rate | Taxable Income | Tax rate | Taxable Income | Tax rate |
| $0 to $41,725 | 5.06% | Up to $131,220 | 10% | $0 to $45,225 | 10.5% |
| $41,725.01 to $83,451 | 7.7% | $131.220.01 to $157,464 | 12% | $45,225.01 to $129,214 | 12.5% |
| $83,451.01 to $95,812 | 10.5% | $157,464.01 to $209,952 | 13% | Over $129,214 | 14.5% |
| $95,812.01 to $116,344 | 12.29% | $209,952.01 to $314,928 | 14% | ||
| $116,344.01 to $157,748 | 14.7% | $314,928.01 and up | 15% | Manitoba
(basic personal amount: $10,145) |
|
| $157,748.01 to $220,000 | 16.8% | Taxable Income | Tax rate | ||
| Over $220,000 | 20.5% | $0 to $33,389 | 10.8% | ||
| $33,390 to $72,164 | 12.75% | ||||
| Over $72,164 | 17.4% | ||||
| Ontario
(basic personal amount: $10,783) |
Quebec
(basic personal amount: $15,532) |
New Brunswick
(basic personal amount: $10,459) |
|||
| Taxable Income | Tax rate | Taxable Income | Tax rate | Taxable Income | Tax rate |
| $0 to $44,740 | 5.05% | $0 to $44,545 | 15% | $0 to $43,401 | 9.68% |
| $44,740.01 to $89,482 | 9.15% | $44,545.01 to $89,080 | 20% | $43,401.01 to $86,803 | 14.82% |
| $89,482.01 to $150,000 | 11.16% | $89,080.01 to $108,390 | 24.5% | $86,803.01 to $141,122 | 16.52% |
| $150,000.01 to $220,000 | 12.16% | Over $108,390.01 | 25.75% | $141,122.01 to $160,776 | 17.84% |
| Over $220,000 | 13.16% | Over $160,776 | 20.3% | ||
| Nova Scotia
(basic personal amount: $8,481) |
Prince Edward Island
(basic personal amount: $10,000) |
Newfoundland and Labrador
(basic personal amount: $9,498) |
|||
| Taxable Income | Tax rate | Taxable Income | Tax rate | Taxable Income | Tax rate |
| $0 to $29,590 | 8.79% | $0 to $31,984 | 9.8% | $0 to $37,929 | 8.7% |
| $29,590.01 to $59,180 | 14.95% | $31,984.01 to $63,969 | 13.8% | $37,929.01 to $75,858 | 14.5% |
| $59,180.01 to $93,000 | 16.67% | Over $63,969 | 16.7% | $75,858.01 to $135,432 | 15.8% |
| $93,000.01 to $150,000 | 17.5% | $135,432.01 to $189,604 | 17.3% | ||
| Over $150,000 | 21% | Over $189,604 | 18.3 | ||
| Nunavut
(basic personal amount: $16,304) |
Northwest Territories
(basic personal amount: $15,093) |
Yukon
(basic personal amount: $13,229) |
|||
| Taxable Income | Tax rate | Taxable Income | Tax rate | Taxable Income | Tax rate |
| $0 to $46,277 | 4% | $0 to $43,957 | 5.9% | $0 to $48,535 | 6.4% |
| $46,277.01 to $92,555 | 7% | $43,957.01 to $87,916 | 8.6% | $48,535.01 to $97,069 | 9% |
| $92,555.01 to $150,473 | 9% | $87,916.01 to $142,932 | 12.2% | $97,069.01 to $150,473 | 10.9% |
| Over $150,473 | 11.5% | Over $142,932 | 14.05% | $150,473.01 to $500,000 | 12.8% |
| Over $500,000 | 15% | ||||
2020 Federal Tax Income Brackets (source: Government of Canada)
| (basic personal amount: $13,229)
Taxable Income |
0%
Tax rate |
|---|---|
| $0 to $48,535 | 15% |
| $48,535.01 to $97,069 | 20.5% |
| $97,069.01 to $150,473 | 26% |
| $150,473.01 to $214,368 | 29% |
| Over $214,368 | 33% |
To calculate the income taxes for any individual, you must total all taxes from all taxable earnings in every tax bracket. The final amount owed will depend on applicable tax credits, such as the basic personal tax credit. There may also be tax surcharges – income tax law is very complex.
[latex]\text{income tax}=\sum (\text{taxable income in tax bracket})\cdot(\text{tax bracket rate})[/latex]
- Income Tax: The total of all tax portions in all tax brackets represents the amount of taxes that must be deducted from annual gross earnings and remitted to the appropriate government(s). You must complete these calculations both federally and provincially to determine the total annual income taxes.
- Eligible Income in Tax Bracket: All taxable earnings fall into tax brackets, as listed in the two tables above. Therefore, you must separate gross earnings into the different tax brackets. The amount of gross earnings in any tax bracket is then taxed at the associated tax rate.
- Tax Bracket Rate: Every tax bracket has an associated tax rate as listed in the two tables above. This rate increases as the gross earnings increase. Multiply the gross earnings in any tax bracket by this rate to calculate the portion of the earnings that are owed in taxes.
For example, assume you live in British Columbia and your gross income was $64,000 in 2020. Here is how you would calculate your annual total federal and provincial taxes for that year, accounting only for the basic personal income*:
The gross earnings are $64,000.
Federally, your taxable income falls into the first two brackets. The first $48,535 is taxed at 15%, thus 0.15(48,535) = $7,280.25. The remaining $15,465 (the difference between $64,000 and $48,535) is taxed at 20.5%, thus 0.205(15,465) = $3,170.33. From this we deduct the basic personal income tax credit, applying the lowest tax bracket to the basic personal amount: 0.15(13,229) = 1,984.35. So the total federal income tax owed is 7,280.25 + 3,170.33 – 1,984.35 = $8,466.23.
Provincially, your income falls into the first two brackets for British Columbia. The first $41,725 is taxed at 5.06%, thus 0.0506(41,725) = $2,111.29. The remaining $22,275 (the difference between $64,000 and $41,725) is taxed at 7.7%, thus 0.077(22,275) = $1,574.84. From this we deduct the basic personal income tax credit, applying the lowest tax bracket to the basic personal amount: 0.0506(10,949) = $554.02. Hence the total provincial income tax owed is 2,111.29 + 1,574.84 – 554.02 = $3,132.11.
Your total income tax owed, after the basic personal tax credit is applied, is the sum of the provincial and the federal taxes, that is 7,738.63 + 8,466.23 = $16,204.86, which is the amount that will be deducted from total gross earnings. Note that this is a basic calculation and that, in reality, many other considerations would enter into the calculation.
Things To Watch Out For
Have you ever heard someone say, “I earn more income and moved to a higher tax bracket, so now I am earning less money and my paycheque is lower”? The progressive tax system used in Canada makes this statement untrue.
Remember that tax rates apply only to the portion of the gross earnings in the tax bracket and are not retroactive to lower levels of income. Specifically, the amount you are earning after tax is only reduced for the part that is above what you earned before, and only the part that is in the next tax bracket.
Concept Check
Check your understanding of income taxes and how they are calculated.
MathMatize: Income Taxes in Canada
Example 3.2 A: Federal and Provincial Income Taxes
A Canadian wage earner has gross income of $97,250. Calculate the federal and provincial annual income taxes individually, and then sum the amounts to calculate the total annual income taxes and apply the basic personal tax credit, if the wage earner lives in:
a. Ontario
b. New Brunswick
c. Alberta
Answer:
Federal tax:
Federal taxable income = 97,250
Federal tax = 0.15(48,535) + 0.205(97,069 – 48,535) + 0.26(97,250 – 97,069) = 17,276.78
Federal basic personal tax credit = 0.15(13,229) = 1,984.35
Federal tax after basic personal tax credit = 17,276.78 – 1,984.35 = 15,292.43
a. Ontario:
Ontario taxable income = 97,250
Ontario tax = 0.0505(44,740) + 0.0915(– 44,740)
Ontario basic personal tax credit = 0.0505(10,783) = 544.54
Ontario tax after basic personal tax credit = – 544.54 = 6,675.63
Total Ontario and federal tax after basic personal tax credit = 6,675.63 + 15,292.43 = $21,968.06
b. New Brunswick:
New Brunswick taxable income = 97,250
New Brunswick tax = 0.0968(43,401) + 0.1482(86,803-43,401)+0.1652(97,250-86,803)
New Brunswick basic personal tax credit = 0.0968(10,459) = 1,012.43
New Brunswick tax after basic personal tax credit = – 1,012.43 = 11,346.81
Total New Brunswick and federal tax after basic personal tax credit = 11,346.81 + 15,292.43 = $26,639.24
c. Alberta:
Alberta taxable income = 97,250
Alberta tax = 0.10(97,250= 9,725
Alberta basic personal tax credit = 0.10(19,369) = 1,936.90
Alberta tax after basic personal tax credit = 9,725– 1,936.90 = 7,788.10
Total Alberta and federal tax after basic personal tax credit = 7,788.10 + 15,292.43 = $23,080.53
Section Exercises
Work on section 3.2 exercises in Fundamentals of Business Math Exercises. Discuss your solutions with your peers and/or course instructor.
You may consult answers to select exercises: Fundamentals of Business Math Exercises – Select Answers
