24.2.3 Taxation Of Income

Overview

Understanding the taxation of income in Canada is crucial for financial planning and investment management. This section provides a detailed explanation of federal and provincial tax rates and how they apply to taxable income.

Federal Tax Rates

The basic tax rates are applied to different brackets of taxable income. The applicable federal tax rates for individuals in 2020 are shown in the table below (excluding tax credits).

Table A

Source: Adapted from Canada Revenue Agency

Note: The Canada Revenue Agency website (www.canada.ca/en/revenue-agency) should be consulted for current tax-related information.

Provincial Tax Rates

Currently, all provinces levy their own tax on taxable income. Provincial amounts are calculated in essentially the same way as federal tax. Adding the provincial rate to the federal rate gives the taxpayer’s combined marginal tax rate, which is the rate at which tax must be paid on each additional dollar of income earned.

Example: Calculation of Federal Income Tax

Let’s examine an example to better understand the tax calculations.

Example: Margaret’s employment income during 2020 was $155,000. She has no other sources of income and is a Canadian resident. Her federal tax (before credits are applied, and based on the rates in Table A) is $32,427.59, as shown in the Table B below.

Table B

If Margaret were to earn an additional dollar, increasing her taxable income from $155,000 to $155,001, she would pay 29% federal tax on that dollar. In other words, her federal marginal tax rate is 29%.

Key Takeaways

• Canadian income tax consists of both federal and provincial rates.
• The federal tax rates are tiered based on income brackets.
• The combined marginal tax rate includes both federal and provincial tax rates.

Frequently Asked Questions

1. What is a marginal tax rate?

The marginal tax rate is the rate at which tax is paid on each additional dollar of income earned. It applies to the highest portion of income earned within a given tax bracket.

2. How are provincial tax rates calculated?

Provincial tax rates are calculated in essentially the same way as federal tax rates. Each province has its specific tax brackets and rates, and these are added to the federal rates to determine a taxpayer’s combined marginal rate.

3. Where can I find the most up-to-date tax rates?

For the most up-to-date tax rates and tax-related information, visit the Canada Revenue Agency website at www.canada.ca/en/revenue-agency.

Glossary & Definitions

• Marginal Tax Rate: The rate at which tax is paid on each additional dollar of income earned.
• Tax Brackets: Ranges of income that are taxed at different rates.
• Tax Payable: The amount of tax that is owed by the individual or entity.

Charts and Diagrams

To visualize how different incomes fall into various tax brackets, consider the following chart:

    pie
	    title Federal Income Tax Brackets (2020)
	    "15% on first $48,535" : 31500000
	    "20.5% on next $48,534" : 9950000
	    "26% on next $53,404" : 13885000
	    "29% on next $63,895" : 1312830
	    "33% over $214,368" : 1000000

This comprehensive overview serves as a valuable resource for understanding the essentials of income taxation in Canada, ensuring you are well-prepared for the Canadian Securities Course certification exam.