Know Your Marginal Tax Rate

Canadians are required to pay both federal and provincial/territorial income tax. Quebeckers have their own tax system, a combination of federal and provincial/territorial tax. Both levels of government base the rate of tax on levels of income, split into tax brackets. A higher rate of income tax is applied to each higher tax bracket. Federal and provincial/territorial tax brackets and rates often do not coincide but the two are added together when calculating your total tax bill. Quite simply, the more you earn, the more you pay. This is referred to as a progressive tax system.

Your marginal tax rate (MTR) is the combined federal and provincial/territorial rates of tax that must be paid on the next additional dollar of income that you earn. The average tax rate is the rate of tax that is charged, on average, for your taxable income. When you do tax planning, it’s important to know not only your MTR but also those of your other family members so you can do better tax planning.

Tax deductions reduce our taxable income from the top, which can provide us with tax savings at our MTR or even lower our tax bracket. Any additional earnings (such as overtime or company bonuses) are added to your overall income.

Calculating your income tax can be a long and complex job. Want a simpler look at the process? Below is a summary of the steps involved in reaching the total amount of taxes payable.

1. Calculate total income: include income from all sources.

2. Determine taxable income: subtract allowable deductions from your total income.

3. Calculate federal-provincial/territorial tax payable: multiply taxable income by both the federal and provincial/territorial tax rates then combine the two amounts.

4. Calculate net tax owed: deduct tax credits (a percentage of tax credits can be deducted from your federal and provincial/territorial tax payable).

5. Calculate total tax payable: tax payable minus credits any taxes paid during the year (such as payroll deductions or installments). See the example below for more details.

Federal credits reduce federal income tax and provincial credits reduce provincial income tax.

The following table is a sample calculation of total income tax payable. (Please note, this example is for illustration purposes only. Many factors, including your provincial/territorial tax rate, total income, deductions and credits will impact the amount.)

Calculate

Total Tax Payable

After-Tax Income

Total income

 

$100,000

Less deductions

 

($10,000)

Taxable income

 

$90,000

Combined federal & provincial tax

$22,000

 

Tax credits applied

($5,000)

 

Net tax owed

$17,000

($17,000)

Tax deducted at source & installments

 ($15,000)

 

Total tax payable

$2,000

 

After-tax  income

 

$73,000

 

Use the combined federal-provincial/territorial tax rates tables to estimate your tax bill, choose between RRSP and TFSA contributions and evaluate income-splitting strategies.

For Quebec Only

You may deduct a refundable Quebec abatement on your federal income tax and benefit return if you resided in Quebec at the end of the year or carried out business in Quebec during the year. It is equal to 16.5% of “Basic Federal Tax” on income earned in Quebec. However, a separate Quebec tax return must be filed in addition to the federal return.