5 Ways To Calculate Income Tax in Canada

Often, you get your paycheck for the month, and at that little corner, you zoom in on the word “taxes.” You realize that a chunk of your salary has been deducted because of taxation. While most people know what taxes are and what they are used for, some are still unaware of what they are.

Of the population who might know what taxes are, few know how to calculate their taxes. Understanding taxes and how they work will help you, as a taxpayer, to manage your finances and minimize the impact of taxes on your income. So, in this article, you will learn what taxes are and how to calculate income taxes.

What are taxes?

Taxes are mandatory contributions that a government entity (local, regional, or national) levies on individuals or corporations. They usually fall on those who bear the burden of the tax. For example, it could be a business or end consumers of a business’s goods.

When a tax is levied against an individual, it requires a percentage of the taxpayer’s earnings or money remitted to the government. Therefore, payment of taxes is compulsory, and tax evasion, a deliberate failure of an individual to pay their total tax liabilities, is punishable by law and can result in severe penalties.

Knowing how difficult and confusing it might be to calculate your tax, many websites and software have developed a solution known as tax calculators. Wealth Simple provides taxpayers with a 2021 income tax calculator BC to estimate their income tax easier.

What are taxes used for?

Taxes or tax revenues are used to finance government activities such as public works and services, e.g., road development, the building of schools, and programs like social security and medical care. Also, the government uses taxes to build and maintain the infrastructure used in a country.

The Government of Canada is divided into three levels: the federal, provincial and territorial, and municipal. These three levels of government provide their citizens with various services and programs funded by taxes.

So, when the government collects your taxes, they return them in the form of services like education, free health care, highways, and other social benefits.

Types of taxes in Canada

There are various types of taxes in Canada that the government collects from citizens. Every kind of tax applies to different categories of people. The most common types of taxes in Canada include:

1. Income tax

An income tax is a tax that has been imposed on an individual’s personal income or profits. This type of tax is also levied on the profits of organizations. The earnings subject to income taxes can come from wages, salaries, dividends, royalties, rents, gambling winnings, etc.

The Income Tax Act is an act that governs income taxes in Canada. The act states that “an income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year.”

2. Sales tax

This is a form of tax that final consumers pay for their purchases. It is a consumption tax that customers spend on goods and services. A business is only expected to collect sales tax if the government considers such a company a nexus — the connection between the business and the government.

Sales tax is often confused with Value-Added Tax (VAT). The significant difference is that only retailers collect sales tax. However, VAT is collected by retailers, wholesalers, distributors, etc.

3. Property tax

Individuals or businesses who own properties pay property tax. These properties could be lands, houses, cars, boats, etc. Property owners pay the government where their properties are located.

The local government where such properties are uses the money paid in taxes for water and sewer maintenance. The tax rate is based on the value of the property and market rates for that year.

4. Corporate tax

Corporate tax is what corporations or institutions pay to the government. This type of tax is paid on the taxable earnings or income of the institutions. The rates paid by corporations differ by country. This is because most corporate taxes are often imposed at the national level. These taxes may be paid by corporations located within a country, doing business there, etc.

5. Payroll tax

Payroll tax is one of the most commonly paid taxes. This is tax paid by employees through their employers to the government. The taxes are paid on wages, salaries, and even tips. Employers hold on to a percentage of their employees’ income, then pay it to the government later. So, they pay their employees’ taxes for them. Federal payroll taxes are directly paid to the Internal Revenue Service (IRS).

6. Value-Added tax

This consumption tax is paid on goods and services, just like Sales Tax. However, it is paid at each product or service supply chain stage. This means it is added from the beginning of production up to the point of purchase. So, Value-added tax (VAT) can have a fixed rate.

This means that everyone pays the same VAT, regardless of how rich or poor each person is. One benefit of VAT is that it reduces tax evasion. This is because the tax is already added to the good or service.

How to calculate income tax in Canada

When calculating your income tax, you should note the following:

• You do not tax your whole income. This is because there is something known as taxable income. Your taxable income is the income you have left after certain deductions have been removed. These deductions include pension, health insurance, etc.
• So, when you want to calculate your income tax, you have to determine what your taxable income is. Once you have identified your taxable income, you will need to know what tax rate or bracket your income falls under.
• Income taxes are progressive, which means people with a lower income pay a lower tax rate than those with a higher income. So, as your income increases, your tax increases. This is also known as a graduated income tax system.
• Each province in Canada has a different tax rate for income taxes. These rates are adjusted every tax year for inflation and other factors.

Tax rates for Canadian provinces as of 2022

These are the rates according to some Canadian provinces and territories.

1. Newfoundland and Labrador

• 8.7% on the portion of your taxable income that is $39,147 or less
• 14.5% on the part of your taxable income more than $39,147 but less than $78,294
• 15.8% on the portion of your taxable income more than $78,294 but less than $139,780
• 17.8% on the amount of your taxable income more than $139,780 but less than $195,693
• 19.8% on the portion of your taxable income more than $195,693 but less than $250,000
• 20.8% on the part of your taxable income more than $250,000 but less than $500,000
• 21.3% on the portion of your taxable income more than $500,000 but less than $1,000,000
• 21.8% on the amount of your taxable income more than $1,000,000

2. British Columbia

• 5.06% on the portion of your taxable income that is $43,070 or less
• 7.7% on the part of your taxable income that is more than $43,070 but not more than $86,141
• 10.5% on the portion of your taxable income that is more than $86,141 but not more than $98,901
• 12.29% on the percentage of your taxable income that is more than $98,901 but not more than $120,094
• 14.7% on the portion of your taxable income that is more than $120,094 but not more than $162,832
• 16.8% on the amount of your taxable income that is more than $162,832 but not more than $227,091
• 20.5% on the portion of your taxable income that is more than $227,091

3. Saskatchewan

• 10.5% on the portion of your taxable income that is $46,773 or less
• 12.5% on the amount of your taxable income that is more than $46,773 but not more than $133,638
• 14.5% on the portion of your taxable income that is more than $133,638

4. Ontario

• 5.05% on the portion of your taxable income that is $46,226 or less
• 9.15% on the part of your taxable income that is more than $46,226 but not more than $92,454
• 11.16% on the portion of your taxable income that is more than $92,454 but not more than $150,000
• 12.16% on the amount of your taxable income that is more than $150,000 but not more than $220,000
• 13.16% on the portion of your taxable income that is more than $220,000

5. Nova Scotia

• 8.79% on the portion of your taxable income that is $29,590 or less
• 14.95% on the amount of your taxable income that is more than $29,590 but not more than $59,180
• 16.67% on the part of your taxable income that is more than $59,180 but not more than $93,000
• 17.5% on the portion of your taxable income that is more than $93,000 but not more than $150,000
• 21% on the part of your taxable income that is more than $150,000

Calculating income tax

Now, it is time to go into the calculation of income taxes. These are examples to explain how to calculate income tax in Canada.

Example one

If a resident of British Columbia has a taxable income of $60,000, this is how the income tax will be calculated:

First, you calculate 5.06% of  $43,070, which is $2,179.34.

Then, the next step will be to check for the difference between $60,000 and $43,070, which is equal to $16,930.

Next, you will multiply 7.7% by the difference, which is $16,930. The result will be $1,303.61

To get your income tax, you need to find the sum of $2,179.34 and $1,303.61, which is $3,482.95

Example two

A resident of Nova Scotia, after all, deductions, has a taxable income of $50,000. Below is how you will calculate their income tax.

The first step is to calculate 8.79% of $29,590. The result is $2,600.96

After, you find the difference between $50,000 and $29,590, and that will be $20,410

Then, you calculate 14.95% of $20,410, which is $3,051.30

The addition of $2,600.96 and $3,051.30 will be the income tax, and that is $5,652.26

Example three

If a resident of Ontario has a taxable income of $70,000, this is how the calculation goes:

First, determine 5.05% of $46,226, and you’ll get $2,334.41

Next, you’ll find the difference between $70,000 and $46,226, which is $23,774

Then, calculate 9.15% of $23,774, which is $2,175.32

After this, you find the sum of $2,334.41 and $2,175.32, which is $4,509.73. This is the income tax.

When you figure out how taxes work, you will be able to manage your finances better, as an individual and as a corporation, which will lead to an increase in profitability.

Conclusion

Calculating taxes can seem very confusing. This is especially true if you do not have a background in accounting or economics. But, with the proper guidance, you should have a hang of it. After going through this article, you are expected to have more knowledge on taxes and how to calculate income taxes in Canada.