Progressive Tax System

The Canadian tax system we use is a progressive tax system. The main concept for this system is that the more money you make, the more you pay in taxes as based on a rate change related to income increases. One key factor in the Canadian progressive tax system is that the amount of income to a certain limit is taxed at the first tax bracket, then if there is a surplus of income over the limit, that amount is then taxed at the second tax bracket, and so on. It is the amount of income above each tax bracket that is taxed at a higher rate.

How the Canadian Tax System Works

Here is an example demonstrating a progressive tax system:

Let’s say the first income tax bracket applies to an income of $0 – $50,000 and has a rate of 15%.

Let’s say the second income tax bracket applies to income of $50,000 to $100,000 and has a rate of 30%

We have two individuals; individual A has an income of $30,000 whereas individual B has an income of $80,000.

Now let’s calculate individual A and B’s income tax modeled after the Canadian Progressive Tax System:

Individual A:

Earnings = $30,000

  • Tax = $30,000 x 15% = $4,500

Individual A would only fall into the first tax bracket, therefore they would only apply the first bracket tax rate.

Individual B:

Earnings = $80,000

  • Tax = ($50,000 x 15%) + ($30,000 x 30%)

= $7,500 + $9,000

= $16,500

Individual B would fall into the first tax bracket and would be taxed according to the first tax bracket rate for the limit amount of $50,000. Since individual B’s income exceeds the limit of the first tax bracket, the excess amount of $30,000 would then fall into the secondary income tax bracket and therefore be taxed at the secondary tax bracket rate of 30%.

A common misunderstanding is that if an individual falls into a certain Canadian tax bracket, their full amount of income will be taxed at the corresponding tax bracket rate. This is false as you can see in the previous example.

In the Progressive Canadian Tax System an individual’s income level is like a bucket filling up with water. The first bucket needs to be filled up before entering the secondary bucket. And so on. Applying taxing rates to this concept, no matter how full or empty the first bucket is with water (income), you will be taxed at that first “bucket” rate. Only if you completely fill up the first bucket will you enter the second bucket, where that amount in the second bucket will be taxed at the second “bucket” rate. The water (income) that was needed to fill up the first bucket in order to enter the second bucket will still be taxed at the first “bucket” rate.

The 2018 Canadian Income Tax rates are as followed:

Federal

  • $46,605 or less = 15%
  • $46,605 – $93,208 = 20.5%
  • $93,208 – $144,489 = 26%
  • $144,489 – $205,842 = 29%
  • $205,842 or greater = 33%

Provincial (Ontario)

  • $42,960 or less = 5.05%
  • $42,960 – $85,923 = 9.15%
  • $85,923 – $150,000 = 11.16%
  • $150,000 – $220,000 = 12.16%
  • $220,000 or greater = 13.16%

Here are the answers to some frequently asked questions.

If you have any further questions please contact James Abbott CPA and Associates at 1-905-831-6383 or email us.

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