Updated to 2009 Tax Year
You may or may not be aware that Canada’s income tax system is set up in a “progressive” manner. Basically the more you earn, the more you are taxed. In fact you may have heard people referring to high-income earners losing half of what they make to the government. While it is true that a high income earner will pay a lot of money in tax, they don’t normally pay HALF of their income to the income tax collectors.
Allow me to explain… There is no 50% tax bracket in Canada. In Ontario, the highest tax bracket that exists is 46.41% for income over $126,265 (for the 2009 tax year). So right off the bat you can see that someone would not lose HALF their earnings to income tax. But there is more to this story than just that. Let’s start with an example and then work backwards… If Bob earned $130,000 for 2009, he would have a combined total federal and provincial income tax of $41,171. That would leave him with a “take-home pay” of approximately $88,829. As you can see this is clearly not half of his income. So what gives?
The Candian tax system uses what are commonly called “tax brackets”. Each bracket has its own rate of tax, and as you move up through the brackets the rate of tax increases until you reach the top tax bracket which is 46.41% (Ontario). Here are the tax brackets for Ontario (2009 Combined Federal and Ontario Provincial Personal Income Tax Rates as sourced from Ernst & Young):
| Income Bracket | Marginal Tax Rate |
| $0 – $10,320 | 0.00% |
| $10,321 – $12,269 | 15.50% |
| $12,270 – $15,658 | 27.60% |
| $15,659 – $36,848 | 21.55% |
| $36,849 – $40,726 | 24.65% |
| $40,727 – $64,881 | 31.15% |
| $64,882 – $73,698 | 32.98% |
| $73,699 – $76,442 | 35.39% |
| $76,443 – $81,452 | 39.41% |
| $81,453 – $126,264 | 43.41% |
| $126,265 + | 46.41% |
If you earned $130,000 you would be in the highest “Marginal Tax Bracket” subject to the highest “Marginal Tax Rate” of 46.41%, but that rate of 46.41% ONLY applies to the income over $126,265. As you can see from the table above, the first $10,320 of your income (no matter how much your total income is) incurs no personal income tax. The concept of “Average Tax Rate” is just a way of figuring out roughly how much of your income is going to the government in the form of personal income tax. If we go back to our high income earner ($130,000) and do the math, we will find: $41,171 Total Tax Bill / $130,000 Total Income = 31.67% Average Tax Rate.
Average Tax Rates serve no purpose for tax filings – they are only calculated to see how much of what you earn is going to the government. MARGINAL TAX RATES come into play for many calcuations and are important in calculating the effects of certain financial strategies – so that number is ultimately more important. The Average Tax Rate is just nice to know… Or not! :)
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About Preet
The brackets are more complex if you include CPP, EI, and the Ontario “health” premium. Here are my calculations:
http://a-loonie-saved.blogspot.com/2008/03/income-tax-rant.html
(My lower brackets don’t line up with yours, so you may have found a bug in my tax calculator…)
Not only in Canada, I believe many other countries also set up a progressive income tax system. It is only fair if the more you earn, the more you are taxed.
@Penny Stock Picks: You don’t need a progressive tax system for that. Higher earners pay more tax than lower earners in a flat tax system too.
I wasn’t making any judgment about progressive tax systems–only about overly complex ones.
Man, I hope we can get the income tax abolished some time in the future! I like how Ron Paul advocates that in the US.
Hi Preet,
Just a quick note regarding the link to tax rates on income: It takes you to Ernst & Young’s website, but I see no tax rate calculator anywhere on the site. Bad link perhaps?
P.S. Thanks for the contest. I didn’t win(story of my life) but it was nice to have the chance. Look forward to more “reader rewards” in the future.
@Russ – thanks for noticing that. I’ve updated the post and links for 2009! Cheers!
I believe there is a number mistake on your tax bracket quotes…
$10,321 – $12,269 15.50%
$12,270 – $15,658 27.60%….???? should this be 17.60%
$15,659 – $36,848 21.55%
@Dale Latam: No, it is correct as is. Here is the verbatim explanation from Ernst and Young: “Individuals resident in Ontario on 31 December 2009 with taxable income up to $12,269, pay no provincial income tax as a result of a low-income tax reduction. The low-income tax reduction ($205 of Ontario tax) is clawed back for income in excess of $12,269 until the reduction is eliminated, resulting in an additional 6.05% of provincial tax on income between $12,269
and $15,659.”
This is excellent. Where are these numbers coming from, though? CRA has much smaller number of brackets listed on their page:
http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html
and if you combine federal with provincial numbers (for Ontario), I see much larger number of brackets here. For example, where is the number $12,269 coming from (that, of course, is not the only number that does not line up)?
@Ivo – the above figures factor in thresholds for certain tax credits I believe, which can be more advantageous at lower incomes and reduced with higher incomes. I believe the list posted here is actually more accurate than the CRA link you posted, which does not include various credit programs, just the hard brackets.
We certainly have a complex tax system, don’t we? :)
Preet: Thanks for your response. Another question. I tried to write a simple calculator using the table above, and the results were consistently different from the results obtained on the online E&Y calculator:
http://www.ey.com/CA/en/Services/Tax/Tax-Calculators-2009-Personal-Tax
Than I tried a very simple example:
Income = 12,000
Tax = (12000-10320)*0.155 = $260.4
but the online calculator gives $252.
Does that mean that the table above doesn’t give the whole picture?
Just to add, the $252 number in the example above is easily derived if the tax for the first bracket is 15% instead of 15.5%:
(12000-10320)*0.15 = 252
Since the online calculator matches what my employer calculates, I am guessing that the table above is not quite correct. It seems like the higher brackets are fine, but the lower brackets are not.
Does anybody here know how the government taxes income made on the Foreign Exchange if it is the sole income. I’m a student, don’t have any significant income and was hoping to mess around with Forex using some savings i’ve managed to scrape together. Just wondering what taxes I can look forward to.
@Conrad: First of all, don’t do it. Forex is a zero-sum game, so you have to think you know better than all the pros that do this for a living. As Benjamin Graham warned, you either need to be a defensive investor or an enterprising (professional) investor; you can’t be somewhere in the middle:
Unless you’re going to become a professional forex trader, you ought to stay away from it entirely.
Having said that, your hypothetical profits would be taxed as capital gains.
We, do so lose more than, half of our earnings to taxes. Clothes are taxed, gas, is taxed, vehicles are taxed, furniture, is taxed, second hand goods are taxed. Stop, and think of, what else you purchased, that was taxed. Then think of the HST, being forced on citizens. The HST burden, will fall on people with, no jobs, losing their homes, seniors, wage earners and low income families, and many of us will be homeless because, of the HST. Canada, is so corrupt. There are not enough, wage earners, low income families and seniors, to pay for that corruption, therefore, the governing officials have to dream up new taxes. If the corruption was stopped, there would be no need to tax, the citizens in this country to death. However, the government is an ass, so, we must be prepared, there will be much worse to come.
Thank, You, Very, Much, Linda, For, Your, Insightful, Comment, Maybe, Next, Time, You, Could, Make, It, Seem, Somewhat, Credible, By, Using, Proper, Grammar. Why does the internet allow this kind of situation to occur?
P.S. Linda, if you are still a young, developing mind, I’m sorry for mocking you. If this truly is the case, then continue to build on your feelings. However, you certainly need to gain a better grasp on the English language. If you do, maybe one day you can change this country (or who knows… maybe even the world) for the better.
of coarse the person who stated that clearly you don’t pay half your income to taxes is a complete fool in my 31% tax bracket thats not half my pay BUT I PAY TAXEX ON EVERYTHING I BUY DON’T I ADD THAT UP FOOL THE GOVERNMENT OF THIS COUNTRY OUGHT TPO BE ASHAMED AND WE AS CANADIANS SHOULD BE ALSO WE HAV NO BALLS A CIVIL WAR IS EXCATLY WHAT WE NEED
PS TO YOU CLOWN IT DOESN’T TAKE PROPER GRAMMER TO REALIZE THE GOVERNMENT OFFICES ARE FULL OF THEIVES IF BY INSULTINGS SOMEONES GRAMMER OR USE OF MAKES PAYING HIGHER TAXES ANY BETTER HOPEFULLY YOU LEARN MANDIRAN REAL QUICK WONT BE LONG BEFORE THATS THE OFFICAL LANGUAGE
You forgot PST, GST and the soon to come HST. That is why it is over 50% for those making incomes greater than $100,000!
Taxation is theft.
Jeez… I just want everyone to notice that there are at least two different “Patricks” posting here. I’m not so naive as to think that taxation is theft!
Patrick: so u don’t think it is theft? What is your definition of the word theft?!
wow not understanding, the third bracket is the wrong % and 46.41% of $130 000 is $56 433 not 41k who does the math you better do it again
@wow – please read the post again. The third bracket is not wrong, it just looks wrong – explanations provided in the comments. And 46.41% is the MTR not the average tax rate for a $130,000 income.
For any who are confused, this is exactly how to calculate your marginal tax rate using his original example of an income of $130,000. I rounded off the tax rate percentages for simpler calculations. There are no taxes for the initial $10,320 so we’ll start with the next bracket:
($12,269-$10,321)15% = $292.20
($15,658-$12,270)28% = $948.64
($36,848-$15,659)22% = $4661.58
($40,726-$36,849)25% = $969.25
($64,881-$40,727)31% = $7487.74
($73,698-$64,882)33% = $2909.28
($76,442-$73,699)35% = $960.05
($81,452-$76,443)39% = $1953.51
($126,264-$81,453)43% = $19268.73
($130,000-$126,265)46% = $1718.10
Add those numbers up and you get $41,169.08
Taxes are not difficult or complex. It just has to be explained correctly. Here’s a good link about marginal and average tax rates.
http://www.maxi-pedia.com/marginal+average+tax+rate+difference
Wow, I see they’ve finally eliminated the incidious little line on the return called “surtax”, where you figure out the tax amount using the brackets, and then add an additional 50% to it. That made the rate WAYYYY more than advertised.
They still do the trick where they don’t reduce your taxable income using your deductions (which would reduce the number of dollars in the highest bracket) but rather they “give” you non-refundable tax credits, which reduce the tax dollars under the lowest rate.
Don’t forget about each additional bucket the Feds keep for CPP, EI, and then every other level of tax you pay such as municipal property taxes, federal GST, and then provincial taxes, surtaxes, fees, and hidden taxes in gas, etc. You are still quite readily being RAPED by the government as a whole.
Anything that any level of government takes from you is part of “taxes”. There is a constant shift of money transferred between levels of government as “transfer payments”. If city “X” doesn’t dance like a monkey for the Feds/Prov, they cut the flow of transfer payments, and they city turns around and raises fees, mill rates, and ups the value of properties. In the end there is only one taxpayer – you.
this is misleading
the tax rate and health care benefits depend on the province.
there is a common myth now a days
that, canadians are taxed to death because of our health care system
this is not true..
you end up paying a lot less in totality than if you were an american with health insurance
that’s a fact
this myth is being created in order to discredit public health care
please be careful not to be part of this