Tax time and tax brackets in Canada – everyone’s favorite time of year and favorite topic, when we find out how much the government is going to extort from us and reluctantly, painfully, tearfully make out that check and mail it off.
It’s not quite that bad, but can often feel like it.
Taxes, after all, are necessary for infrastructure, social support, defense/safety, and all the other nice things of civilized life that we mostly take for granted. But there’s no point in paying more than you have to.
And although calculating and paying taxes is a yearly ritual, it almost never gets easy considering all the hoops you have to jump through. At best, it can be exhausting, especially without some knowledge of tax brackets and without some quality professional assistance.
So you should have, then, at least some understanding of the 2020 tax brackets in Canada.
How Tax Brackets Canada Work and What They Are
Your tax bracket determines how much tax you have to pay: the more you make, the more you pay (usually). So let’s first look at how the tax brackets in Canada work and how they are determined.
Determination of Your Tax Bracket
In broadest terms, your tax bracket is based on what is termed your “taxable income.” This is your gross income less any qualifying tax deductions. Basically, what it amounts to is your net income – the amount of income you have left after claiming all the deductions you’re eligible for.
Once you’ve calculated your taxable income, it’s simply a matter of applying the relevant federal and provincial rates to it. The process typically involves calculating the federal income tax and then the provincial and then adding the two to arrive at the total tax owed – the marginal tax rate.
“Your marginal tax rate is the combined federal and provincial income taxes you pay on all sources of income at tax time. The tax rate varies by how much income you declare at the end of the year on your T1 General Income Tax Return (the form with the exciting-sounding name that you fill out at tax time) and where you live in Canada.”
Federal Tax Brackets in Canada for 2020
The federal income-based tax brackets are, of course, the same across all provinces and are, according to the Canada Revenue Agency (CRA), as follows:
- First $48,535 of taxable income: 15%
- Taxable income over $48,535 up to $97,069: 20.5%
- Taxable income over $97,069 up to $150,473: 26%
- Taxable income over $150,473 up to $214,368: 29%
- Taxable income 0ver $214,368: 33%
Provincial and Other Differences in Canadian Tax Brackets/Rates
Now the foregoing seems pretty straightforward, but, unfortunately, it’s not that simple and easy.
Factors Influencing Tax Brackets/Rates
There are a few critical points to keep in mind bout tax brackets in Canada (also known as tax rates), the most salient of which are:
- Tax brackets/tax rates vary according to amount of income.
- Different rates are paid on different portions of income.
- Tax brackets Canada reflect a marginal tax rate system.
- The tax system is a progressive or graduated system, as we noted above, with lower-income earners taxed at a lower rate (percentage) than higher-income earners.
Provincial 2020 Tax Brackets
And, as we also mentioned, your province of residence on December 31 determines the provincial portion of your income tax, which can vary pretty widely from province to province.
Here are just a few illustrative examples from the CRA:
British Columbia Tax Rates
- First $41,725 of taxable income: 5.06%
- $41,726 to $83451: 7.7%
- $83,452 to $95,812: 10.5%
- $95,813 to $116,344: 12.29%
- $116,345 to $157,748: 14.7%
- Over $157,748: 16.8%
Alberta Tax Rates
- First $131,220 of taxable income: 10%
- $131,221 to $157,464: 12%
- $157,465 yo $209,952: 13%
- $209,953 to $314,928: 14%
- Over $314,928: 15%
Saskatchewan Tax Rates
- First $45,225 of taxable income: 10.5%
- $45,226 to $129,214: 12.5%
- Over $129,214: 14.5%
2020 Indexation Changes in Tax Brackets Canada
This year, 2020, saw some fairly significant changes to the rules governing tax brackets and tax rates in Canada. Chief among these are the increase in the amount you can earn before facing federal income tax. This increase, surprisingly, goes beyond the standard inflationary adjustment.
“Each year, most (but not all) income tax and benefit amounts are indexed to inflation. In early December, the Canada Revenue Agency announced that the inflation rate that will be used to index the 2020 tax brackets and amounts will be 1.9 per cent. This rate was calculated by taking the percentage change in the average monthly Consumer Price Index data as reported by Statistics Canada for the 12-month period ended Sept. 30, 2019 relative to the average CPI for the 12-month period ended on Sept. 30, 2018.”
In addition, there are “increases to tax bracket thresholds and various amounts relating to non-refundable credits” that took effect on 1 January 2020. There are also increases in the allowable amounts for certain benefits such as the GST/HST credit and Canada Child Benefit, which took effect on 1 July 2020. “This coincides with the beginning of the program year for these benefit payments, which are income-tested and based on your prior year’s net income, as reported on your 2019 tax return.”
The five basic federal income tax brackets remain, but indexed for inflation at the 1.9% rate (as laid out above). Also, most of the provincial tax brackets in Canada have also been indexed to inflation, but by means of the indexation factor peculiar to each province. Just keep in mind that each province has its own set of tax brackets that you’ll use to arrive at your marginal rate.
A Note on Tax Deductions and Payment
When it comes to deductions and their impact on tax brackets, there’s often more than a little confusion. For these tax deductions don’t always work the way many people assume they do.
A tax deduction does not reduce the amount of tax you have to pay. Rather, it serves to reduce your gross income, which determines your tax bracket. So taking advantage of deductions can put you in a lower tax bracket and so reduce the amount of taxes you owe and have to pay. The result may be about the same, but the mechanism is different.
The most commonly used deductions include:
- Pension Adjustment – “You get credit for any pension contributions made in the calendar year on your behalf. Your employer will list the Pension Adjustment amount in box 52 on your T-4 slip that lists your income and income tax deducted for the year.”
- Registered Retirement Savings Plan (RRSP) – This deduction can be taken up to the maximum annual allowable amount. “Your financial institution will provide you with a contribution receipt, and you [need to] find out how much RRSP contribution room you have.”
- Union and professional dues
- Child-care expenses
- Charitable donations
- Donations to political parties
Another distinction that needs to be made here is the difference between income tax and capital gains tax. This is important because different tax rules obtain for different kinds of investment income. For example, interest income is 100% taxable, but capital gains are only 50% taxable. This means, then, that “you can save more on taxes if you put interest-earning assets into your TFSA or RRSP.”
Now, payment of taxes . . . that’s sometimes a challenge if you fall into one of the higher tax brackets in Canada. You do have some options, though.
If you can’t pay all your taxes in one go, the CRA will allow you to work out a payment plan. But you do need to be aware that you’ll have to pay interest on the balance still owed.
If, however, you can’t pay the tax you owe and don’t try to work out a payment plan, the CRA can seize any refundable tax credits you may have coming. They can also take you to court in order to seize anything you have in your bank account(s).
Recap of Considerations for 2020 Tax Brackets in Canada
So the main things to keep in mind when it comes to tax brackets (tax rates) for 2020 in Canada and how they apply to your specific situation are:
- “The tax rates, also known as tax brackets, apply to personal income earned between predetermined minimum and maximum amounts. By understanding where your income falls within the tax brackets can help you make decisions about when and how to claim certain deductions and credits.”
- The tax rates apply only to taxable income – that is, your gross income less any deductions you may be eligible for.
- An understanding of tax brackets and your current bracket will help you understand the tax implications of having a side business and/or extra income.
- Each province has its own set of tax brackets, over and above the federal tax brackets.
- Tax brackets in Canada have changed for 2020, so the amount owed or amount to be refunded may be different this year.
The upshot of all this, then, is that this whole matter of tax brackets in Canada is fairly complex and different in some respect for 2020.
But that’s exactly why Envolta exists – to help you make the best possible decisions for your finances.