The After-Tax Effect
18 Canada’s Income Tax System
The government uses the taxes it collects to fund public facilities, programs, and services. Taxes gathered in Canada help pay for education and schools, health care, building of roads and bridges, and economic development.
From a high level, Canada’s income tax system is intended to tax higher-income individuals at a higher rate than lower-income individuals. The tax structure aims to promote fairness and redistribute wealth to support social programs and services that benefit all those in Canada.
There is a large myth or misunderstanding that Canadian tax residents with higher incomes have all their income (ie. every dollar) subject to higher tax rates than those with lower incomes. This misconception tends to discourage individuals from taking on additional working hours or a secondary job, as some make the incorrect assumption that all their hard earned extra income will be lost to increased and additional taxes.
Canada’s income tax system is one that works on progressive tax rates. Progressive tax involves having tax rates that increase (or progress) as taxable income increases. The federal and provincial tax system uses tax brackets to calculate the amount of tax liability on an individual’s taxable income amount.
Please note that the taxable income amount in which the progressive tax rates are applied is determined through an individual’s total worldwide income less any qualifying deductions. A breakdown of the income tax return parts is shown later in this Chapter.
To understand progressive tax rates that Canada’s income tax system is based upon, it is probably best to think about each tax bracket as separate buckets. For each taxable income dollar, a separate tax bracket (or bucket) at its own pre-determined tax rate will be applied first. When the bucket is full, then the next taxable income dollar amount will go into the next bucket with a progressively higher income tax rate. Therefore, only the additional taxable dollar amounts above certain thresholds will have a higher income tax rate applied to it. The first tax bracket, or lowest income dollars for every single individual, is taxed at the same tax rate.
For the 2023 taxation year, the federal tax brackets on taxable income are as follows:
Taxable Income Federal Tax Rate
- First $53,359 15.00%
- Over $53,359 up to $106,717 20.50%
- Over $106,717 up to $165,430 26.00%
- Over $165,430 up to $235,675 29.32%
- Over $235,675 33.00%
Let’s illustrate the progressive tax rates and tax bracket concept through an example:
Example: Tax Brackets (Federal Tax)
Theresa is an experienced trades worker who worked a lot of overtime and out at camp locations. Theresa has $170,000 of taxable income. Federal tax amount calculated (before any tax credits applied):
Theresa will have a Federal Tax calculation of $35,547.54, prior to any tax credits applied. Not every dollar of taxable income is subject to the higher 29.32% federal tax rate.
Example: Tax Brackets (Provincial Tax)
Theresa lives and works in the Province of Saskatchewan. A similar calculation will be performed on Theresa’s Saskatchewan taxable income based on the Saskatchewan progressive tax rates:
- First
- Second
Theresa will have a Provincial Saskatchewan Tax calculation of $21,686.34, prior to any tax credits applied. $71,537 of Theresa’s $170,000 taxable income is subject to the higher 14.50% provincial Saskatchewan income tax rate.
Understanding Effective vs. Marginal Tax Rates
Due to the graduated tax rates in Canada’s tax system, individuals will have a different effective and marginal tax rate. The effective tax rate refers to the average tax rate showing as a percentage of the total tax owing over total taxable income. The marginal tax rate refers to the tax rate that an individual will pay tax on the next dollar of taxable income. It is usually the highest tax bracket of an individual.
Example: Effective vs. Marginal Tax Rates
Going back to the example of Theresa above, the individual will qualify for the basic personal amount and Canada employment credit. Theresa’s total tax liability is calculated as follows:
Net Federal Tax (Federal Tax Liability)
Federal Tax Amount $35,547.54
Less: 2023 Basic Personal Amount Tax Credit ($15,000 x 15%) (2,250.00)
Less: 2023 Canada Employment Amount Tax Credit ($1,368 x 15%) (205.20)
Net Federal Tax (Federal Tax Liability) $33,092.34
Net Provincial Tax (Provincial Tax Liability)
Provincial Tax Amount $21,686.34
Less: 2023 Basic Personal Amount Tax Credit ($17,661 x 10.50%) (1,854.41)
Net Provincial Tax (Provincial Tax Liability) $19,831.93
Total Tax Liability (Net Federal Tax + Net Provincial Tax) $52,924.27
Knowing the total tax liability, the effective tax rate and marginal tax rate can be determined.
Total Tax Liability $52,924.27
Divided by: Taxable Income 170,000.00
Effective Tax Rate (%) 31.13%
Federal Marginal Tax Rate 29.32%
Provincial Marginal Tax Rate 14.50%
Marginal Tax Rate (%) 43.82%
Theresa has an effective tax rate of 31.13%, and a marginal tax rate of 43.82%.
Knowing your effective and marginal tax rates helps to estimate the total tax burden that an individual may have, as well as assist in tax-planning strategies.
