Practical Guide: Understanding Tax Brackets

Canada’s tax system can be confusing, and it is easy to get lost in the details. To make things simpler, here are the key points you should remember:

1. There is not just one tax rate that applies to all your income. Different rates apply to different portions of your total income.

2. You must pay tax to both levels of government (federal and provincial).

3. Deductions and credits reduce the tax you must pay, but in different ways: Deductions reduce your taxable income, while credits reduce the tax you owe. If you owe very little tax, you may not be able to use your credits.

Here is a chart to help you understand the brackets (left column) and an example for someone earning $85,000 per year (right column):

Source : https://www.taxtips.ca/taxrates/qc.htm

In the left column, each color represents a different bracket. For simplicity, the rates shown combine federal and provincial (Quebec) rates.

To estimate the amount of tax this person will have to pay, here is the calculation:

($16,452 – $0)             X 0%               = $0    

($54,345 – $16,452)   X 25.7%          = $9,739

($58,523 – $54,345)   X 30.7%          = $1,283

($85,000 – $58,523)   X 36.1%          = $9,558

= $20,580 in taxes payable (approximate)

It is important to note that the amount of tax payable will likely be lower, since this calculation does not consider all the credits and deductions the person may be entitled to.

Why did we indicate 0% for the first bracket?

Thanks to the tax credit called the “Basic Personal Amount”, the tax payable on this first bracket is zero. In reality, the first $16,452 is taxed at 26.5%, but the credit “cancels out” this tax.

What is the difference between the effective tax rate and the marginal tax rate?

The effective tax rate is the percentage of your total income that you pay in taxes. To calculate it, divide the tax payable by the total income. In our example, the effective rate would be about 24.2%: $20,580 ÷ $85,000.

The marginal tax rate is the rate applied to the last bracket you fall into. In our example, the marginal rate would be 36.1%, since that is the last bracket reached with an income of $85,000 (see the yellow box in our chart).

To help you estimate the amount of tax you will have to pay in April and avoid calculating everything manually, here are some useful online calculators:

1. Quebec income tax calculator | TurboTax

2. Canada income tax calculator | Fidelity Investments Canada

3. Personal tax calculator | EY Canada

If you have questions about how the brackets work, the tax rates, or the calculators, please feel free to contact us.

---

IMPORTANT DISCLAIMERS

Patrick Racicot and Loïc Poupart are associated with PEAK Securities Inc. PEAK Securities Inc. is a full-service investment dealer registered with the IIROC, limiting its responsibilities to investment products such as stocks, bonds, ETFs and mutual funds. PEAK Securities Inc. is a member of the Canadian Investor Protection Fund (CIPF). Services available only to residents of Quebec and Ontario. Consult our privacy policy.

The information contained in this document has been prepared by Patrick Racicot, Portfolio Manager, and Loïc Poupart, Investment Advisor, of PEAK Securities Inc. and has been obtained from sources believed to be reliable and relevant. The information in this document is of a general nature and may not be complete with respect to your personal situation. This document does not constitute investment advice. The opinions expressed herein do not necessarily reflect those of PEAK Securities Inc. PEAK Securities Inc. is not responsible for the content of this document.