The Canadian Tax Bracket System

October 15th, 2007 • Related • Filed Under
                                                         

Updated to 2009 Tax Year

You may or may not be aware that Canada’s income tax system is set up in a “progressive” manner. Basically the more you earn, the more you are taxed. In fact you may have heard people referring to high-income earners losing half of what they make to the government. While it is true that a high income earner will pay a lot of money in tax, they don’t normally pay HALF of their income to the income tax collectors.

Allow me to explain… There is no 50% tax bracket in Canada. In Ontario, the highest tax bracket that exists is 46.41% for income over $126,265 (for the 2009 tax year). So right off the bat you can see that someone would not lose HALF their earnings to income tax. But there is more to this story than just that. Let’s start with an example and then work backwards… If Bob earned $130,000 for 2009, he would have a combined total federal and provincial income tax of $41,171. That would leave him with a “take-home pay” of approximately $88,829. As you can see this is clearly not half of his income. So what gives?

The Candian tax system uses what are commonly called “tax brackets”. Each bracket has its own rate of tax, and as you move up through the brackets the rate of tax increases until you reach the top tax bracket which is 46.41% (Ontario). Here are the tax brackets for Ontario (2009 Combined Federal and Ontario Provincial Personal Income Tax Rates as sourced from Ernst & Young):

Income Bracket Marginal Tax Rate
$0 – $10,320 0.00%
$10,321 – $12,269 15.50%
$12,270 – $15,658 27.60%
$15,659 – $36,848 21.55%
$36,849 – $40,726 24.65%
$40,727 – $64,881 31.15%
$64,882 – $73,698 32.98%
$73,699 – $76,442 35.39%
$76,443 – $81,452 39.41%
$81,453 – $126,264 43.41%
$126,265 + 46.41%

If you earned $130,000 you would be in the highest “Marginal Tax Bracket” subject to the highest “Marginal Tax Rate” of 46.41%, but that rate of 46.41% ONLY applies to the income over $126,265. As you can see from the table above, the first $10,320 of your income (no matter how much your total income is) incurs no personal income tax. The concept of “Average Tax Rate” is just a way of figuring out roughly how much of your income is going to the government in the form of personal income tax. If we go back to our high income earner ($130,000) and do the math, we will find: $41,171 Total Tax Bill / $130,000 Total Income = 31.67% Average Tax Rate.

Average Tax Rates serve no purpose for tax filings – they are only calculated to see how much of what you earn is going to the government. MARGINAL TAX RATES come into play for many calcuations and are important in calculating the effects of certain financial strategies – so that number is ultimately more important. The Average Tax Rate is just nice to know… Or not! :)

Here is a link for quickly figuring out your Marginal Tax Rate, Average Tax Rate and Tax Rates on different types of income.

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There Are 26 Responses So Far. »

  1. Comment by Patrick on 16 February 2009:

    The brackets are more complex if you include CPP, EI, and the Ontario “health” premium. Here are my calculations:

    http://a-loonie-saved.blogspot.com/2008/03/income-tax-rant.html

    (My lower brackets don’t line up with yours, so you may have found a bug in my tax calculator…)

  2. Comment by Penny Stock Picks on 9 March 2009:

    Not only in Canada, I believe many other countries also set up a progressive income tax system. It is only fair if the more you earn, the more you are taxed.

  3. Comment by Patrick on 9 March 2009:

    @Penny Stock Picks: You don’t need a progressive tax system for that. Higher earners pay more tax than lower earners in a flat tax system too.

    I wasn’t making any judgment about progressive tax systems–only about overly complex ones.

  4. Pingback by Many americans emigrate to Canada on 15 March 2009:

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  5. Comment by Patrick on 28 June 2009:

    Man, I hope we can get the income tax abolished some time in the future! I like how Ron Paul advocates that in the US.

  6. Comment by Russ on 4 August 2009:

    Hi Preet,
    Just a quick note regarding the link to tax rates on income: It takes you to Ernst & Young’s website, but I see no tax rate calculator anywhere on the site. Bad link perhaps?

    P.S. Thanks for the contest. I didn’t win(story of my life) but it was nice to have the chance. Look forward to more “reader rewards” in the future.

  7. Comment by Preet on 5 August 2009:

    @Russ – thanks for noticing that. I’ve updated the post and links for 2009! Cheers!

  8. Pingback by In OECD Countries, Universal Healthcare Gets High Marks - Politics and Other Controversies - City-Data Forum on 20 August 2009:

    [...] Originally Posted by Tank1906 In OECD Countries, Universal Healthcare Gets High Marks "Despite the August congressional recess, there is no escaping the debate about healthcare reform in the U.S. Gallup compared Organization for Economic Co-operation and Development (OECD) countries that offer universal health coverage with countries that do not offer it and found that respondents in countries with universal coverage are somewhat more likely to express confidence in their national health systems and satisfaction with the availability of quality healthcare in their communities. On availability of quality local healthcare, the median percentage of satisfied respondents among countries with universal health coverage is 79%, 13 percentage points higher than the median percentage among those without universal coverage (66%). For those that have confidence in their national health system, the difference is again 13 points (73% for those with universal coverage, 60% for those without)." Does anyone take into consideration that many of the countries with UHC have about half the population of the US. Also has anyone compared the tax brackets of these countries to ours. Here is Canada’s tax bracket. Tell me if you want to be taxed at almost 40% for making $76,443 – $81,452? The Canadian Tax Bracket System : WhereDoesAllMyMoneyGo.com [...]

  9. Comment by Dale Latam on 20 September 2009:

    I believe there is a number mistake on your tax bracket quotes…
    $10,321 – $12,269 15.50%
    $12,270 – $15,658 27.60%….???? should this be 17.60%
    $15,659 – $36,848 21.55%

  10. Comment by Preet on 22 September 2009:

    @Dale Latam: No, it is correct as is. Here is the verbatim explanation from Ernst and Young: “Individuals resident in Ontario on 31 December 2009 with taxable income up to $12,269, pay no provincial income tax as a result of a low-income tax reduction. The low-income tax reduction ($205 of Ontario tax) is clawed back for income in excess of $12,269 until the reduction is eliminated, resulting in an additional 6.05% of provincial tax on income between $12,269
    and $15,659.”

  11. Comment by Ivo on 30 November 2009:

    This is excellent. Where are these numbers coming from, though? CRA has much smaller number of brackets listed on their page:

    http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html

    and if you combine federal with provincial numbers (for Ontario), I see much larger number of brackets here. For example, where is the number $12,269 coming from (that, of course, is not the only number that does not line up)?

  12. Comment by Preet on 30 November 2009:

    @Ivo – the above figures factor in thresholds for certain tax credits I believe, which can be more advantageous at lower incomes and reduced with higher incomes. I believe the list posted here is actually more accurate than the CRA link you posted, which does not include various credit programs, just the hard brackets.

    We certainly have a complex tax system, don’t we? :)

  13. Comment by Ivo on 1 December 2009:

    Preet: Thanks for your response. Another question. I tried to write a simple calculator using the table above, and the results were consistently different from the results obtained on the online E&Y calculator:

    http://www.ey.com/CA/en/Services/Tax/Tax-Calculators-2009-Personal-Tax

    Than I tried a very simple example:

    Income = 12,000
    Tax = (12000-10320)*0.155 = $260.4

    but the online calculator gives $252.

    Does that mean that the table above doesn’t give the whole picture?

  14. Comment by Ivo on 1 December 2009:

    Just to add, the $252 number in the example above is easily derived if the tax for the first bracket is 15% instead of 15.5%:

    (12000-10320)*0.15 = 252

    Since the online calculator matches what my employer calculates, I am guessing that the table above is not quite correct. It seems like the higher brackets are fine, but the lower brackets are not.

  15. Pingback by Nobody Cares... - Page 3926 - TRIBE - tribe.ca on 15 December 2009:

    [...] Originally Posted by kaniz That's what I figured – when I'm more bored at work I might break down the numbers. Either way – yay! the amount more I'm getting is now enough to make a noticeable difference in my monthly spending. Where before it was just "yay, an extra $50 bucks" (or something) The Canadian Tax Bracket System : WhereDoesAllMyMoneyGo.com [...]

  16. Comment by Conrad on 5 January 2010:

    Does anybody here know how the government taxes income made on the Foreign Exchange if it is the sole income. I’m a student, don’t have any significant income and was hoping to mess around with Forex using some savings i’ve managed to scrape together. Just wondering what taxes I can look forward to.

  17. Comment by Patrick on 5 January 2010:

    @Conrad: First of all, don’t do it. Forex is a zero-sum game, so you have to think you know better than all the pros that do this for a living. As Benjamin Graham warned, you either need to be a defensive investor or an enterprising (professional) investor; you can’t be somewhere in the middle:

    There is no room in this philosophy for a
    middle ground, or a series of gradations, between the passive and
    aggressive status. Many, perhaps most, investors seek to place
    themselves in such an intermediate category; in our opinion that is
    a compromise that is more likely to produce disappointment than
    achievement. As an investor you cannot soundly become “half a businessman,” expecting thereby to achieve half the normal rate of business profits on your funds.

    Unless you’re going to become a professional forex trader, you ought to stay away from it entirely.

    Having said that, your hypothetical profits would be taxed as capital gains.

  18. Comment by Linda on 10 January 2010:

    We, do so lose more than, half of our earnings to taxes. Clothes are taxed, gas, is taxed, vehicles are taxed, furniture, is taxed, second hand goods are taxed. Stop, and think of, what else you purchased, that was taxed. Then think of the HST, being forced on citizens. The HST burden, will fall on people with, no jobs, losing their homes, seniors, wage earners and low income families, and many of us will be homeless because, of the HST. Canada, is so corrupt. There are not enough, wage earners, low income families and seniors, to pay for that corruption, therefore, the governing officials have to dream up new taxes. If the corruption was stopped, there would be no need to tax, the citizens in this country to death. However, the government is an ass, so, we must be prepared, there will be much worse to come.

  19. Comment by Wow on 10 February 2010:

    Thank, You, Very, Much, Linda, For, Your, Insightful, Comment, Maybe, Next, Time, You, Could, Make, It, Seem, Somewhat, Credible, By, Using, Proper, Grammar. Why does the internet allow this kind of situation to occur?

    P.S. Linda, if you are still a young, developing mind, I’m sorry for mocking you. If this truly is the case, then continue to build on your feelings. However, you certainly need to gain a better grasp on the English language. If you do, maybe one day you can change this country (or who knows… maybe even the world) for the better.

  20. Comment by steve green on 18 February 2010:

    of coarse the person who stated that clearly you don’t pay half your income to taxes is a complete fool in my 31% tax bracket thats not half my pay BUT I PAY TAXEX ON EVERYTHING I BUY DON’T I ADD THAT UP FOOL THE GOVERNMENT OF THIS COUNTRY OUGHT TPO BE ASHAMED AND WE AS CANADIANS SHOULD BE ALSO WE HAV NO BALLS A CIVIL WAR IS EXCATLY WHAT WE NEED

  21. Comment by steve green on 18 February 2010:

    PS TO YOU CLOWN IT DOESN’T TAKE PROPER GRAMMER TO REALIZE THE GOVERNMENT OFFICES ARE FULL OF THEIVES IF BY INSULTINGS SOMEONES GRAMMER OR USE OF MAKES PAYING HIGHER TAXES ANY BETTER HOPEFULLY YOU LEARN MANDIRAN REAL QUICK WONT BE LONG BEFORE THATS THE OFFICAL LANGUAGE

  22. Comment by Chris on 22 February 2010:

    You forgot PST, GST and the soon to come HST. That is why it is over 50% for those making incomes greater than $100,000!

  23. Comment by Patrick on 22 February 2010:

    Taxation is theft.

    “Only the State obtains its revenue by coercion, by threatening dire penalties should the income not be forthcoming. That coercion is known as “taxation,” although in less regularized epochs it was often known as “tribute.” Taxation is theft, purely and simply, even though it is theft on a grand and colossal scale which no acknowledged criminals could hope to match. It is a compulsory seizure of the property of the State’s inhabitants, or subjects.” – Murrray N. Rothbard

  24. Comment by Patrick on 22 February 2010:

    Jeez… I just want everyone to notice that there are at least two different “Patricks” posting here. I’m not so naive as to think that taxation is theft!

  25. Comment by Patrick on 22 February 2010:

    Patrick: so u don’t think it is theft? What is your definition of the word theft?!

  26. Pingback by The Canadian Tax Bracket System « CTYA`s Blog on 2 March 2010:

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