Canadian Income Tax: 101

Nothing can be certain in this world except death and taxes, and Canada’s taxes are as plenty as our lakes and mountains.

We are taxed on consumption, such as sales tax, land transfer tax, liquor tax, gas tax, and customs on imported products. The Harmonized Sales Tax (HST) in Ontario is calculated from the Ontario sales tax rate (8%) and the Canadian rate (5%) for a total of 13%. We pay additional tax for specialty products such as gas, liquor, or tobacco. We are also taxed on assets, such as property tax, car registration, and a dog license.


Finally, the Canadian Revenue Agency (CRA) collects tax on the income we earn. If you have a consistent job and are paid hourly or an annual salary, it may be easy to confirm your income and the respective annual income tax. In fact, many companies will withhold your tax from your pay so you do not need to worry about a large tax bill when you file each year. However, what money is classified as taxable income?


First, we have our employment earnings or the money we make employed by someone else. The next is earned in business activity, so the income your company makes from selling a product or service after all their expenses are paid. The next source is investment income, such as rent from an investment property or interest earned on an investment account. Finally, when you sell an asset for a profit, that is considered capital gain. A capital gain is taxed at 50% of the profit from selling an investment or a property.


We have a graduated income tax system in Canada, meaning the more we make the more income tax we pay. Now that we know what is considered taxable income, let's break down the federal brackets in 2022:

Taxable Income

Tax Rate

Up to $50,197

15%

$50,197 - $100,392

20.5%

$100,392 - $155,625

26%

$155,625 - $221,708

29%

over $221,708

33%

If you make $40 000, you will pay 15% or $6000 in federal income taxes. If you make $140,000, you will pay 15% on the first $50,197, plus 20% on the next $50,195, plus 26% on the remaining $39,608 of your taxable income which totals $27,837 in federal income tax that year.


Now, we are going to make it slightly more complicated and add the Ontario provincial tax brackets for 2022 as well. To find the tax rate for your area, click here.

Taxable Income

Tax Rate

Up to $46,226

5.05%

$46,226 - $92,454

9.15%

$92,454 - $150,000

11.16%

$150,000 - $220,000

12.16%

over $220,000

13.16%

If you make $40,000, you will pay 5.05% in provincial tax, or $2,020, for a total annual income tax bill of $8,020. If you make $140,000, you will pay 5.05% on the first $46,226, plus 9.15% on the next $46,228, plus 11.16% on the remaining $47,546 of your taxable income which totals $11,870 in provincial income tax and a total income tax bill of $39,707 that year.

Salary

Income Tax

Net Pay

$40,000

$8,020

$31,980

$140,000

$39,707

$100,293

When you get a raise, you should celebrate it. You will take home more disposable income, but you will pay a more significant portion each year toward income tax.


If you have any questions, reach out to us at theteam@waverleywealth.ca and feel free to share anything you have learned about income tax in our forum.

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