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 exemption. In other words, it is tax-free income. This is designed to help low-income earners in Canada. Tax brackets 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). The basic personal amount is deducted from gross income to create the taxable income amount. Other deductions from the gross income may also apply when determining the taxable income, depending on different provincial and federal income tax policies that change over time.

2020 Provincial Income Tax Brackets (source: Government of Canada)

British Columbia Alberta Saskatchewan
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
$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 Quebec New Brunswick
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 Prince Edward Island Newfoundland and Labrador
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 Northwest Territories Yukon
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)

Taxable Income 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.

[latex]\text{income tax}=\sum (\text{eligible 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 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 taxable gross income is $64,000. Here is how you would calculate your annual total federal and provincial taxes:

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 [latex]48,535 \cdot 0.15 = \$7,280.25[/latex]. The remaining $15,465 (from $48,535 to $64,000) is taxed at 20.5%, thus [latex]15,465 \cdot 0.205 = \$3,170.33[/latex]. So the total federal income tax is [latex]7,280.25+3,170.33=\$10,450.58[/latex].

Provincially, your income falls into the first two brackets for British Columbia. The first $41,725 is taxed at 5.06%, thus [latex]41,725\cdot 0.0506= $2,111.29[/latex]. The remaining $22,275 (from $41,725 to $64,000) is taxed at 7.7%, thus [latex]22,275 \cdot 0.077= \$1,715.18[/latex]. Hence the total provincial income tax is [latex]2,111.29+1,715.18=\$3,826.47[/latex]

Your total  income tax is the sum of the provincial and the federal taxes, that is [latex]10,450.58 + 3,826.47 = \$14,277.05[/latex], which is the amount that will be deducted from total gross earnings.

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. For example, if your taxable gross income increased from $80,000 to $88,000, your highest tax bracket is now 26% instead of 22%. However, your federal income tax is not calculated at 26% for your entire income. Rather, the first $11,038 is tax free, the next $32,523 is taxed at 15%, the next $43,562 is taxed at 22%, and the final $877 is taxed at 26%.

Paths To Success

It is sometimes beneficial to pre-calculate the total income taxes in any tax bracket under the assumption that the individual’s income comprises the entire tax bracket. This technique is particularly useful when repetitive calculations are required, such as determining the federal income taxes for each employee in an entire company. For example, the second federal tax bracket extends from $11,038.01 to $43,561, representing $32,523 of employee income. Since this bracket is taxed at 15%, someone who earns a higher income always owes the full amount of tax in this category, which is $32,523 × 15% = $4,878.45. The next tax bracket covers $43,561.01 to $87,123, representing $43,562 of income. Someone earning a higher income always owes the full amount of tax in this category, which is $43,562 × 22% = $9,583.64.

Assume taxable gross earnings of $88,000. With your pre-calculated income taxes in each bracket, you know the income taxes in the first three tax brackets are $0, $4,878.45, and $9,583.64, or $14,462.09 in total. You only need to calculate the tax on the portion of income in the final tax bracket of $877 × 26% = $228.02. The grand total is $14,462.09 + $228.02 = $14,690.11.

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 taxable 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, if the wage earner lives in:

a. Ontario
b. New Brunswick
c. Alberta

Answer:

a. Ontario, third tax bracket; federal, third bracket

[latex]\begin{align*} \text{provincial tax}&=0.0505\cdot 44,740+0.0915\cdot(89,482-44,740)\\ &\ \ \ +0.1116\cdot(97,250-89,482)\\ &=\$7,220.17 \end{align*}[/latex]

[latex]\begin{align*} \text{federal tax}&=0.15\cdot 48,535+0.205\cdot(97,069-48,535)\\ &\ \ \ +0.26\cdot(97,250-97,069)\\ &=\$17,275.78 \end{align*}[/latex]

[latex]\text{total income tax}=7,220.17+17,275.78=\$24,495.95[/latex]

b. New Brunswick, third tax bracket; federal = $24,495.95 (from a)

[latex]\begin{align*} \text{provincial tax}&=0.0968\cdot 43,401+0.1482\cdot(86,803-43,401)\\ &\ \ \ +0.1652\cdot(97,250-86,803)\\ &=\$12,359.24 \end{align*}[/latex]

[latex]\text{total income tax}=12,359.24+17,275.78=\$29,635.02[/latex]

c. Alberta, first tax bracket; federal = $24,495.95 (from a)

[latex]\text{provincial tax}=0.10\cdot 97,250=\$9,725[/latex]

[latex]\text{total income tax}=9,725+17,275.78=\$27,000.78[/latex]

 

Exercises

Use the provincial and federal tax tables introduced earlier in this chapter when you determine income taxes in these exercises.

Mechanics

For questions 1–3, determine only the federal income taxes on the following gross taxable incomes.

  1. $22,375
  2. $158,914
  3. $102,100

For questions 4–6, determine only the provincial income taxes on the following gross taxable incomes.

  1. $61,000 in Newfoundland and Labrador
  2. $83,345 in Saskatchewan
  3. $78,775 in British Columbia

For questions 7 and 8, determine the total federal and provincial/territorial taxes on the following gross taxable incomes.

  1. $48,910 in the Northwest Territories
  2. $65,525 in Prince Edward Island

Applications

  1. Nadia lives in Manitoba and has three part-time jobs. Her gross annual taxable income from each job was $5,300, $21,450, and $25,390. How much federal and provincial income tax does Nadia owe?
  2. If Delaney’s gross taxable income increases from $71,000 to $79,000, by what dollar amount will her after-tax pay change once federal and provincial income taxes are deducted in the province of Quebec?
  3. Helen just moved from Saskatchewan to her new job in Alberta at the same rate of pay of $51,225. By what dollar amount will her provincial income taxes change?
  4. Jane has received two job offers that she thinks are relatively equal. The only difference lies in the salary. The first job offer is for a position in Nova Scotia earning gross taxable income of $63,375. The second job offer is for a position in British Columbia earning gross taxable income of $61,990. If Jane will select the job that has the highest after-tax income, which one should she choose? How much better is this option in dollars?
  5. Suppose an employee earns $111,300 in gross taxable income. Calculate the federal and provincial income taxes that need to be deducted if he lives in either Saskatchewan, Ontario, or the Northwest Territories. In which province or territory will he earn the most income after income tax deductions? The least? What is the dollar amount difference among the three alternatives?
  6. After both federal and provincial income taxes are deducted, who would earn more money, an individual earning $85,000 in New Brunswick or an individual earning $79,000 in Nunavut?

Challenge, Critical Thinking, & Other Applications

  1. Rawatha is the human resources manager for her firm located in Yukon. The salespeople for her organization are paid an annual base salary of $30,000 plus 8% straight commission on their annual sales. If the average salesperson sells $210,000 annually, what is the total annual federal and provincial income tax owing on the salesperson’s gross taxable income?
  2. Esmerelda works on the production line and is paid a piecework rate of $2.25 per unit produced. She is capable of producing an average of five units per hour, and works eight hours every weekday. Assuming a 52-week year, what is the annual federal income tax and provincial income tax owing if she lives in Prince Edward Island?
  3. Mary Jane is paid biweekly at a rate of $34.68 per hour and works 36.25 hours every week. Assuming a 52-week year, what are the amounts of the federal income tax deduction and provincial income tax deduction that must be removed from each paycheque if Mary Jane lives in Manitoba? (Hint: income tax would be deducted equally across all paycheques for the year.)
  4. Felix was transferred from his head office in Ontario to Alberta. In accepting the transfer, his employer agreed to increase his salary of $88,000 by $7,000. What is the percent change in Felix’s after-tax income?
  5. If a wage earner paid $2,277.98 in total annual Ontario provincial income taxes, determine his annual gross taxable income.
  6. Perform a comparison across all territories and provinces of the income earned after both federal and provincial income taxes are deducted for a Canadian who earns $56,738 in gross taxable income. Which province or territory has the highest income after deductions? Which has the lowest? What is the percent difference between the two?

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