The income tax rate you pay depends on how much you earn and where you live. Canada’s tax rates are divided into different levels, often referred to as “brackets.” Identifying the tax bracket into which your income falls is the first step to figuring out how much income tax you’ll pay.
» MORE: What is income tax?
What are tax brackets?
Tax brackets determine the rate of income tax Canadians should pay. Canada uses a graduated tax system. Those with higher incomes fall into a higher tax bracket, so they pay a higher tax rate than those with lower incomes who fall into lower tax brackets.
Current tax brackets in Canada
|2021 Federal income tax bracket||2021 Federal income tax rate|
|$49,020 or less||15%|
|$49,021 to $98,040||20.5%|
|$98,041 to $151,978||26%|
|$151,979 to $216,511||29%|
|$216,512 and above||33%|
How do tax brackets work?
Each tax bracket has a corresponding rate of tax. That rate is applied to the portion of your income that falls within the bracket.
So, for example, an income of $60,000 reaches the second federal tax bracket. If you make $60,000 this year, you’ll pay $15% tax on the first $49,020 of income, and 20.50% tax on the remaining $10,980.
But federal income tax is just one part of your total tax bill. In Canada, there are also provincial/territorial tax brackets to factor in. Provinces and territories use their own graduated tax brackets, but the income limits and tax rates will be different from each other and the federal rate.
This means that if you and a friend both make the same amount of money but you live in Ontario and they live in British Columbia, your overall tax rates —federal plus provincial — may be different.
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How to find your tax bracket
As mentioned above, your tax bracket depends on your taxable income as well as where you live in Canada. To figure out which federal tax bracket you are in, you’ll need to know your total taxable income as well as the current federal and provincial/territorial tax rates.
Not sure of your exact annual income? Your pay stub may be of some help. Each stub will show both your gross and net pay for the current pay period, as well year-to-date totals. The total year-to-date pay on your final pay stub of the year can help you estimate your tax bracket.
If you earn money but don’t get a traditional pay stub, perhaps because you’re freelancing, you’ll need to keep close tabs on your gross income and the tax bracket into which it will likely fall. Since your employer won’t be deducting taxes from your income, you’ll have to set this money aside yourself.
No matter how you earn money in Canada, you should receive a T4 slip, which summarizes annual earnings as well as any tax deductions.
» MORE: How to read your pay stub
Can I move to a lower tax bracket?
Paying income tax is a reality of living and working in Canada, but there are things you can do to reduce your taxable income, and potentially, your tax bill.
Tax deductions help lower your taxable income, which can put you in a lower tax bracket. The most common tax deduction in Canada is for contributions made to a Registered Retirement Savings Plan, or RRSP.
For example, if you earned $53,000, and contributed $5,000 to your RRSP by the annual contribution deadline, you may be able to deduct that entire amount, reducing your taxable income to $48,000. Before this tax deduction, you would have had some income in the second tax bracket, but by taking the deduction, you’d drop down to the first.
Tax credits work a little differently. Rather than reducing your taxable income, these claims reduce the total amount of tax you need to pay. Tax credits are offered by the federal and provincial governments and fall under two categories: refundable and non-refundable. Refundable tax credits include the GST/HST credit. Non-refundable tax credits include the personal exemption amount and claims for charitable donations.