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Published November 19, 2021

What is Income Tax?

Income tax is the portion of your annual earnings that's paid to the government. Canada has a graduated income tax system, so your tax rate depends on how much you earn.

Income tax is the portion of annual income that individual residents of Canada pay to the government.

Revenue generated by the income tax is handled by the Canada Revenue Agency (CRA) and used to fund government services such as health care, public education, and the military. Some income tax revenue is also used to provide assistance to eligible Canadians through programs for families, such as the Canada Child Benefit, and seniors, such as Old Age Security and the Guaranteed Income Supplement.

» MORE: What Canadian employees should know about T4 slips

How does Canada’s income tax work?

Canadian employers typically deduct income tax from your earnings each pay period. You should be able to see these deductions on your pay stub every time you get paid.

Even though your employer’s deductions ensure you’re paying income tax, you still need to report your employment earnings and any other income you receive — including passive income, government benefits, interest/investment earnings, pension income — annually to the CRA by filing a tax return. The tax return allows the CRA to determine if you paid enough tax on the income you earned. If you didn’t pay enough income tax, you’ll have to submit the outstanding amount to the CRA. If you paid too much, the CRA will issue you a tax refund.

It’s also important to note that there are federal taxes and provincial/territorial taxes. You add them together to come up with your total rate.

» MORE: What is the Canada Pension Plan?

Federal income tax rates in Canada

Canada has what is known as a graduated tax system for individual federal income taxes (corporations pay a flat tax). This means that the more money you make, the higher the rate of tax you pay. However, you don’t pay the higher tax rates on every dollar you earn, only on the amount of income made within each tax bracket.

Federal Income Tax Rates for 2021

  • 15% on the first $49,020 of taxable income, PLUS
  • 20.50% on the portion of taxable income over $49,020 up to $98,040, PLUS
  • 26% on the portion of taxable income over $98,040 up to $151,978, PLUS
  • 29% on the portion of taxable income over $151,978 up to $216,511 PLUS
  • 33% on taxable income over $216,511

As mentioned above, there are provincial rates that you need to consider as well, and these also vary with your income level. You can look up current provincial and territorial tax rates online.

How to do your income taxes

If your taxes are straightforward, you can prepare your own return. You can go old school and file a paper return, or choose one of the many digital options available. Make sure to use CRA-approved tax software that will help you input your data, calculate your taxes and file your return.

You can also authorize a representative to do your taxes for you. While this can mean a friend or family member, it’s usually a hired professional, such as an accountant, bookkeeper, or tax-prep service. The cost will vary depending on the preparer you use and how complicated your return is.

For modest income and simple tax situations, you may also be able to use a community volunteer tax clinic. This is a free service available to certain Canadians.

» MORE: How first-time home buyer can claim a $5,000 tax credit

How to pay income taxes

Paying your taxes is easy and can be done through several methods including the following:

  • Make an online bill payment to the CRA.
  • Interac debit, Visa debit, or Mastercard debit using CRA MyPayment.
  • Schedule a payment with a pre-authorized debit.
  • Credit card, debit card, Paypal, or Interac e-Transfer (service fees will apply).
  • Wire transfer (for non-residents who need to make a payment but no longer have a Canadian bank account).
  • Pay in person with cheque or debit at your financial institution.
  • Pay in person with cash or debit at a Canada Post location.
  • Pay by cheque or money order via traditional mail.

No matter what method you choose, be sure to confirm that your payment is received. You can do this online through CRA My Account. Allow three days for online payments or 10 days for payments by cheque or money order.

» MORE: How to write a cheque

When are income taxes due?

There are two different dates to be aware of when doing your taxes. The first is the file date and the second is the payment date.

For the majority of individuals, the file date and the payment date are the same: April 30th of every year. If you are self-employed you have until June 15th to file as the taxes are considered to be more complicated. However, the payment date is still April 30th.

There are late fee penalties for not filing on time if you have taxes owing, and you will also be charged interest on any outstanding tax payments.

  • FAQ

    • Do I need to file a tax return?

      If you live and work in Canada, then you should be filing a tax return. Even if you are not earning any money, it’s worth filing anyway because you may be eligible for benefits and credits.

    • What happens if I don’t pay my income taxes?

      Unpaid taxes will incur interest which is compounded daily. If you continue to avoid paying your taxes, the CRA can take legal action against you and even seize and sell your assets to settle your tax debt. If you are unable to pay your taxes, get in touch with the CRA to help with payment arrangements

    • How can I reduce my taxes?

      Claiming any and all deductions and credits for which you’re eligible is the best way to reduce your income tax bill. Utilizing tax-deferred and tax-free accounts for your investments like an RRSP or TFSA is another option to consider.

About the Author

Hannah Logan

Hannah Logan is a writer and blogger who specializes in personal finance and travel. You can follow her personal travel blog or find her on Instagram @hannahlogan21.


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