Canadian Income Tax Brackets

What are Canadian Income Tax Brackets?

This article will outline how Canadian tax brackets function. The income taxationAccounting For Income TaxesIncome taxes and its accounting is a key area of corporate finance. Having a conceptual understanding of accounting for income taxes enables a company to to maintain financial flexibility. Tax is an intricate field to navigate and often confuses even the most skilled financial analysts. system in Canada is a progressive system, meaning that individuals who earn more are generally taxed more. By contrast, in a flat taxation system, everyone would pay the same percentage of their incomes in income taxes. Canadians are required to pay a combination of both federal and provincial income taxes.

Federal Income Tax Brackets (2018)

As of 2018, Canadian tax brackets at the federal level are as follows:

• “Incremental Amount” here refers to the maximum additional income that can be taxed at the next bracket’s tax rate before being taxed overall at a higher rate.
• “Bracket Limit” refers to the maximum total income that can fall into each of the tax brackets.
• “Tax Rate” refers to the applicable rate of taxation for the given income bracket.

Taking a quick look at the rate differences between the lowest and highest tax brackets, we can see that individuals who earn in excess of $205,842 are taxed twice as much as individuals making less than $46,605.

Provincial Income Tax Brackets (2018)

For a complete list of Canadian provincial tax brackets, please visit the Government of Canada’s tax website.

Within Canada, each province imposes its own income tax rates that are set by the provincial governments. Provincial taxes go to fund small-to-medium scale public service and infrastructure projects within the provinces.

Example of Canadian Tax Brackets

Below is a detailed breakdown of how income taxes would be applied on a $300,000 income. The example assumes that the income taxes are being filed in British Columbia and, thus, are subject to B.C. provincial taxes.

More about the Progressive Tax System

Progressive tax systemsProgressive TaxA progressive tax is a tax rate that increases as the taxable value goes up. It is usually segmented into tax brackets that progress to successively higher rates. For example, a progressive tax rate may move from 0% to 45%, from the lowest and highest brackets enable governments to capitalize on the concept of decreasing marginal utility. The idea is that once individuals reach a certain amount of income, each additional dollar generated above the threshold holds less and less utility. It is because after meeting the threshold, individuals begin to view other resources, such as time, as more valuable. Assessing the threshold is quite difficult, as every person follow a different utility curve.

Most tax experts agree that a progressive tax system is most conducive to combatting income inequality.

Additional Resources

Thank you for reading CFI’s guide to Canadian tax brackets. To learn more about related tax topics, check out the following CFI articles:

• Ad Valorem TaxAd Valorem TaxThe term “ad valorem” is Latin for “according to value,” which means that it is flexible, and it depends on the assessed value of an asset, product or service. An ad valorem tax is charged by state and municipal governments, and it is based on the assessed value of a property or product. The most common ad valorem tax
• Permanent/Temporary Differences in Tax AccountingPermanent/Temporary Differences in Tax AccountingPermanent differences are created when there's a discrepancy between pre-tax book income and taxable income under tax returns and tax accounting that is shown to investors. The actual tax payable will come from the tax return.  This guide will explore the impact of these differences in tax accounting
• Tax HavenTax HavenA tax haven or offshore financial center is any country or jurisdiction that offers minimal tax liability to foreign individuals and businesses. Tax havens do not require businesses to operate out of their country or the individuals to reside in their country to receive tax benefits.
• Tax ShieldTax ShieldA Tax Shield is an allowable deduction from taxable income that results in a reduction of taxes owed. The value of these shields depends on the effective tax rate for the corporation or individual. Common expenses that are deductible include depreciation, amortization, mortgage payments and interest expense