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How do Taxes work in Canada?

A look at how changing tax brackets and getting a raise really work.

Andre DeGagne is the Founder and Managing Director of Calgary based Dentro Financial

Trying to decode the tax system can be confusing, but it does not need to be. There are a lot of myths floating around about taxes in Canada, and many of them are misleading. It should be easy to understand who you pay, how much you pay, and why getting a raise and moving up a tax bracket is not pointless. Join us as we explain the basics of how taxes work in Canada.

Who do you pay?

In Canada, the income taxes that you pay go to two places. A portion goes to the federal government, and the rest goes to the provincial/territorial government of the province/territory in which you live.

That is it! For example, if you make $80,000 a year in Alberta, you will be in the 20.5% federal tax bracket and the 10% provincial bracket, making your total marginal income tax rate 30.5%.

What is a tax bracket?

The tax system in Canada is what is known as a progressive or graduated system, which means that the more money you earn, the more tax you pay. Each increase is broken into what are known as tax brackets. A tax bracket is a range of income where you have to pay a specific amount of tax for every dollar you earn in that range. For example, if you earn between $1 and $50,197 a year in Alberta, you will pay 25% in income taxes (15% federal[i] and 10% provincial[ii]). As you earn more money, you move up these tax brackets. Someone who makes $100,000 a year will pay more tax than someone who makes $45,000 a year.

Source: Government of Canada, 2022

So, I get punished for moving up a tax bracket?

To better understand how brackets are used to calculate your income, let’s look at what happens when you get a raise from $50,000 to $51,000 in Alberta. Using the table above, you can see that when you made $50,000 a year, you fell into the 15% federal tax bracket, while after your raise, you moved up into the 20.5% federal tax bracket. In both cases, you fall into the 10% provincial tax bracket. Wait, so does this mean that by getting a raise and moving up a tax bracket, I pay more tax and keep less money than I did before? Why would I bother working harder if the government is just going to take it all?

“Moving up a bracket does not mean that you pay more tax on the whole amount you earn.”

This is a common thought, but the graduated tax system does not punish people in that way. Moving up a bracket does not mean that you pay more tax on the whole amount you earn. Your taxes only increase on the money that spills over into the next tax bracket. This means that before your raise, you paid 25% on the first $50,197 you made and that after your raise, you still pay 25% on the first $50,197 you make. However, as you did move up a tax bracket, you also pay 30.5% on the extra $803 that falls into that next bracket. Meaning that by moving up a bracket, you only paid $294 in increased taxes and got to keep $706 more after your raise.

The progressive tax system is not designed to cripple people when they move up a tax bracket. It is designed to charge people that make less money a lower rate and those that make more an increasing rate. However, this still means that everyone pays the same tax on every dollar they earn in a given bracket regardless of their total income.

We hope that this article helped you understand how taxes work in Canada and that you are now less concerned about moving up a tax bracket when you get your next raise.

We are helping people take control of their finances and reach their financial goals, one day at a time. You can learn more about Dentro Financial at dentrofinancial.com.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be right for you. Consult a financial professional before making any significant financial decisions.

Endnotes

[i] Goverment of Canada, 2022

[ii] Government of Alberta, 2022

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Dentro Financial is a Calgary based hybrid wealth management firm that pairs boutique financial planning with Canadian fintech.

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Andre DeGagne

Andre DeGagne

Andre DeGagne is the Founder and Managing Director of Dentro Financial, a boutique wealth management and financial planning firm located in Calgary, AB.

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