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How is Income Tax Calculated in Canada?
Federal and Provincial Have Their Own Rates
Canadian federal income tax is calculated separately from provincial/territorial income tax. However, both are calculated on the same tax return, except for Quebec. When using tax software, the Quebec and federal returns can be calculated together.
Federally, there are 5 tax brackets, since 2016. Each province has multiple tax brackets. The federal and provincial/territorial income tax rates are combined in our tables of personal income tax rates so that taxpayers can see the total tax rate being paid, including any provincial surtaxes where applicable.
Income Tax Act s. 117.1
For Canada and most provinces, the tax brackets and most other personal tax amounts are adjusted each year for inflation, using a calculated indexation factor. The federal indexation factor for 2023 is calculated as:
average of 12 months CPI All-Items Factors for the 12 months ending Sep 30, 2022
average of 12 months CPI All-Items Factors for the 12 months ending Sep 30, 2021
= indexation factor
For Canada and all provinces except Quebec, rounding is to the nearest one-thousandth, or, where the result obtained is equidistant from two consecutive one-thousandths, to the higher thereof, for:
Quebec Annual Adjustment as per s. 31.1 of the Quebec Taxation Act:
Each tax bracket amount has a "base year". For the federal tax brackets, the base year is 2016 for the tax bracket amounts. The indexation factor for year 1 after the base year is applied to the base year amounts. The result is rounded to even dollars to be used as the year 1 tax bracket amount. The result prior to rounding is used to calculate the indexed amount for year 2.
The provincial/territorial all-items CPI is used for all provinces and territories except Quebec, which uses all-items excluding alcoholic beverages, tobacco products and smokers' supplies and recreational cannabis.
The indexation factor is always applied to the non-rounded prior year amounts, and then rounded to the nearest dollar, except for Quebec, where some amounts are rounded to the nearest $5, and the indexation factor is applied to the previous year rounded amounts.
Each federal personal tax credit amount has its own base year, and of course the federal enhanced basic personal amount is defined by legislation for 2020 to 2023, and will be indexed starting in 2024.
The federal indexation rate is used by
The following provinces do not index their tax brackets:
Manitoba indexes only their tax brackets and basic personal amount.
The provinces that do their indexation using their own indexation factors will also have base years from which their indexation is calculated. The base year for Ontario tax brackets is 2014, but the base year for most of their other personal tax amounts is 2009.
Calculate Taxable Income
First, taxable income is calculated. Taxable income is always the same for the federal and provincial/territorial calculations, except for Quebec, for which the taxable income may differ from the federal amount.
Calculate Income Taxes
Then, federal and provincial/territorial income taxes are separately calculated based on taxable income. See the detailed calculation in the Federal Income Tax and Benefit Return, or form 428 for your province or territory. 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 initial tax calculation for a taxpayer with taxable income of $250,000 for 2022.
Progressive Tax System
The Canadian tax system is a progressive tax system, which means 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.
All calculations below are separate calculations for federal and provincial or territorial taxes.
Calculate Non-Refundable Tax Credits
After income tax amounts are calculated, non-refundable tax credits are deducted from the federal or provincial/territorial tax payable.
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 of Non-Refundable Tax Credits.
Tax Rate for Non-Refundable Tax Credits
The actual tax amount of each credit is calculated by multiplying by the tax rate for the lowest tax bracket. Quebec, until 2016, used 20% instead of the lowest tax rate of 16%. The lowest 16% rate is used for Quebec starting in 2017, except for the tax credits for student loan interest and medical expenses, which still use the 20% rate.
Ordering of Non-Refundable Tax Credits
The tuition and education tax credit can cause other tax credits to be lost, because the amount claimed will be whatever is needed to reduce taxes to zero before certain other tax credits are claimed. See Ordering of Tax Credits.
Basic Personal Amount Tax Credit
The basic personal amount for each province and territory is listed in their tax rate table (link in first paragraph above), 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.
The Federal basic personal amount was enhanced starting with the 2020 taxation year, as were the spousal and eligible dependant amounts, so that the amount of the credits are affected by the taxpayer's taxable income. The effect of this is included in the federal and combined federal + provincial or territorial marginal tax rate tables. The tax brackets that are affected are highlighted in blue.
Nova Scotia has a similar enhancement to its basic personal, spousal, and eligible dependant amounts, for the 2018 and subsequent taxation years. The effect of the enhanced basic personal amount is included in the NS tables of marginal tax rates.
Donation Tax Credit and Dividend Tax Credits
Donations have a 2 or 3 part tax credit calculation, and dividend tax credits are calculated separately. The tax credit amounts are then deducted from the previously calculated income tax.
Political Contribution Tax Credits
The federal political contribution tax credit and all provincial/territorial political contribution tax credits are non-refundable, except for Ontario and Nunavut, which have refundable political contribution tax credits.
Calculate Surtaxes - Ontario & Prince Edward Island
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.
Low-Income Tax Reduction
Some provinces also have a low-income tax reduction which increases the amount that can be earned before any tax is paid.
Although the tax reductions are non-refundable, they are deducted after the addition of surtaxes, and before the deductions for non-refundable dividend tax credits and political contribution tax credits.
The above credits can only be used to reduce income tax to zero.
Ontario Health Premium
The Ontario health premium is added after the above additions and deductions.
Calculate Refundable Tax Credits
There are a few federal refundable tax credits, including the Canada Workers Benefit. Several provinces and territories also have refundable tax credits.
Calculate Payment or Refund Due
Once your income tax payable or refundable is determined, the following are added or deducted to arrive at the tax payment required, or the tax refund due:
Detailed Income Tax Calculators
The Canadian Income Tax & RRSP Savings Calculator and the Quebec Income Tax & RRSP Savings Calculator show, in general, the order in which income, deductions, non-refundable and refundable credits are calculated.
This are quick and easy to use, great for tax professionals and financial planners. The only tax credits included in the tax calculation are the basic personal amount and dividend tax credits.
The only input required in these calculators is your income from 4 different sources, and your choice of tax year.
The Basic Canadian Income Tax Calculator will display taxes payable for every province and territory for 6 years, as well as the marginal tax rate for each source of income for the year chosen. It also allows you to quickly & easily compare original and revised amounts when you change income amounts, tax years, or provinces.
The provincial/territorial tax rates before being combined with the federal rates are shown above the table of combined rates for each province/territory, in our Tables of Personal Income Tax Rates and Tax Brackets in Canada.
Canada Revenue Agency (CRA) Resources
Canada Revenue Agency has an article Canadian Income Tax Rates for Individuals - Current and Previous Years. The CRA tables do not include any provincial/territorial surtaxes. The surtaxes are included in our combined tax rate tables.
Revised: July 31, 2023
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