How is Income Tax Calculated in Canada?
Canadian federal income tax is calculated separately from provincial/territorial income tax. However, both are calculated on the same tax return, except for Quebec.
Federally, there are 5 tax brackets in 2016 (4 in 2015). Each province has multiple tax brackets. The federal and provincial/territorial income tax rates are combined in our tax rate tables so that taxpayers can see the total tax rate being paid, including any provincial surtaxes.
First, taxable income is calculated. Taxable income is the same for the federal and provincial/territorial calculations, except for Quebec, for which the taxable income may differ from the federal amount. Then, federal and provincial/territorial income taxes are separately calculated based on taxable income. To see the detailed calculation, look at Schedule 1 of the federal tax return, or form 428 of the provincial/territorial tax return. These schedules can be found on the Canada Revenue Agency (CRA) website in the tax return forms. For Quebec, see the income tax return and work chart 401 on the Quebec website in the income tax forms. See the following example of the federal Schedule 1 initial tax calculation for a taxpayer with taxable income of $150,000 for 2015.
The tax rates increase as taxable income increases. Everyone pays the lowest tax rate for the amount of their taxable income within the lowest tax bracket. Taxable income in excess of this is taxed at the next higher rate.
After income tax amounts are calculated, non-refundable tax credits are deducted from the tax payable. Again, this is still a separate calculation for federal and provincial taxes. Non-refundable tax credits include the basic personal amount, which is available to every taxpayer. The tax credits are calculated in a particular order, as defined in the federal Income Tax Act and the provincial/territorial Income Tax Acts. A list of most of the non-refundable tax credits can be seen in the tables on the personal tax credits page. The actual tax amount of the credits is calculated by multiplying by the tax rate for the lowest tax bracket, except for Quebec, which uses 20% instead of the lowest tax rate of 16%. Donations have a 2 part tax credit calculation, and dividend tax credits are calculated separately. The tax credit amounts are then deducted from the previously calculated income tax.
PEI provincial surtax is calculated based on net taxes payable after all refundable tax credits have been deducted. Ontario surtax is calculated based on net taxes payable after all refundable tax credits except for dividend tax credits have been deducted. Once federal and provincial/territorial income taxes including surtaxes and net of non-refundable tax credits are calculated (zero if negative), the refundable tax credits are then deducted. If they exceed the net taxes payable, they will be refunded to the taxpayer.
By looking at the Canadian Income Tax & RRSP Savings Calculator, you can see at which point surtaxes (PEI and ON only) are calculated in relation to non-refundable tax credits.
The basic personal amount for each province and territory is listed in their tax rate table, as well as the tax rate that is applied to calculate the tax credit. The basic personal amount is the amount that can be earned before any provincial/territorial tax is paid. Some provinces also have a low-income tax reduction which increases the amount that can be earned before any tax is paid.
The provincial/territorial tax rates before being combined with the federal rates are shown above the table of combined rates for each province/territory. CRA also has an article What are the income tax rates in Canada? The CRA tables do not include any provincial/territorial surtaxes. The surtaxes are included in our combined tax rate tables.
Revised: February 25, 2016
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