Income Tax in Canada: A Guide on the System, Brackets, and Filing

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Oct 01, 2021

Disclaimer: Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.

Canada collects one of the highest tax rates, and its tax system can be confusing for new business owners. How much do you know about how income tax in Canada works? Do you know how to compute your income tax manually? If you do not understand how the tax system works, you will never know your rights or the requirements for income tax returns.

That is why you have to educate yourself and become a responsible citizen and business owner. It is essential to equip yourself with information about the tax system, its brackets, and how to file and compute your income tax.

Cheer up because this article is what you need! Keep scrolling and be informed about the things you need to know about the Canadian tax system.

The Canadian Tax System

After World War I in 1918, Canada needed funds to rebuild the nation, pay debts, and secure pensions for war veterans. Thus, it replaced the temporary Income Tax War Act of 1917 with the Income Tax Act in 1948, mandating all Canadian citizens to pay taxes. 

Today, Canada has a marginal or progressive tax system that increases your tax rate as your income grows. Canadians need to pay two forms of taxes. One is the federal tax, and the other is the provincial tax. Each of them has different tax rates. 

The Canada Revenue Agency (CRA) collects taxes and sets Canada’s income tax brackets. As of 2021, the federal income tax brackets are as follows:

  • 15% on the first $49,020
  • 20.5% on over $49,020 to $98,040
  • 26% on over $98,040 to $151,978
  • 29% on over $151,978 to $216,511
  • 33% over $216,512

Meanwhile, the provincial tax rates may vary between the different Canadian provinces. For example, Ontario has the following provincial tax rates:

  • 5.05% on $45,142
  • 9.15% on over $45,142 to $90,287
  • 11.16% on over $90,287 to $150,000
  • 12.16% on over $150,000 to $220,000
  • 13.16% over $220,000

If you want to learn more about Canada's income tax rate for each province, you may visit the government website to explore each province’s income tax rates.

Steps on Computing Your Income Tax

Computing tax

A common misconception is that if you are earning $80,000, you need to pay a federal tax with a 20.5% rate, thus leaving you with a $16,400 tax. However, the tax brackets are designed to lower your total tax.

Here are the correct steps to follow in computing your income tax.

  1. Determine your net income first. To do this, subtract all the legal deductions like Registered Retirement Savings Plan, pension adjustments, and pension contributions from your gross income.
  2. Let us assume that your net income is $80,000. Thus, the first taxable amount based on the federal income tax brackets is $49,020. Multiply it by 15%, and you get $7,353.
  3. $80,000 is still eligible for the second federal income tax bracket. Since we already taxed the first amount, you must deduct it from your net income: $80,000 − $49,020 = $30,980. Now, multiply the remaining amount of $30,980 by 20.5%, and you have $6,350.90.
  4. Add $7,353 and $6,350.90. You have a total federal tax of $13,703.90.
  5. Now, let us assume that you live and work in Ontario. The first taxable amount is $45,142, and you need to multiply it by 5.05%, which is equivalent to $2,279.67.
  6. You are still eligible for the second bracket, and $80,000 − $45,142 = $34,858. Multiply the remaining amount of $34,858 by 9.15%, you have $3,189.51.
  7. Add $2,279.67 and $3,189.51; you have a total provincial tax of $5,469.18.
  8. Your overall income tax is $19,173.08, and you have a take-home pay of $60,826.92.

Income Tax Return in Canada

Income tax filing involves filling an income tax return form to determine if you owe the government federal or provincial income taxes.

No one can fill out your income tax return for you, so even if you have an accountant, you must still fill out everything correctly from your side. That said, accountants can help you determine your income tax return. 

The main reason why most people don't do their own income tax returns is that they can't find the information they need to fill out the tax forms correctly. You can do your income tax return yourself if you can get your hands on the following:

  • T-slips. These slips tell you how much money came into your account, such as your earnings from an employer or paid interest on a bank account.
  • Receipts. They can be anything that supports the information you declare on your tax form.

You are still the one who needs to file your income tax return, and you can do it several ways. You can send your files by mail or online with the help of NETFILE, EFILE, or Auto-fill My Return. Non-residents can only file tax returns by mail.

Income tax returns in Canada are filed every 30th of April. The deadline for settling outstanding income tax is also on the same day. However, CRA collects taxes monthly, and they appear in your payslip.

Here are the steps you need to do in order to file your income tax returns.

  1. Secure a tax return form by downloading it on the CRA website, or call the CRA hotline 1-855-330-3305 to request a copy.
  2. In order to access tax credits and benefits, complete and submit ON479, ON-BEN, and ON428 forms with your tax return.
  3. Fill out the forms by providing the correct information on each field. Make sure that you also provide accurate details about your income and other financial information.
  4. Send your documents by mail or email.

If you need help with your tax preparation, you can always rely on and consult with an accountant or tax preparation services who have the expertise when it comes to all your tax concerns.

These agencies can help you compute your tax and apply the deductions so that you can be eligible for tax returns. They can also help you file your tax returns properly. Remember: you have to hire someone you can trust and will offer you confidentiality. Allowing other experts to work on your tax means that you will provide sensitive information about yourself.

Aside from accountants and tax preparation firms, many free applications are available on the Internet to help you do both basic and complex tax computations. Just provide the accurate numbers required by these apps, and you can know how much taxes to pay without spending a single cent. 

You can still validate the result you get from free online tax calculators by showing it to accountants. If it is accurate, you can use that online app for the next tax collection.

Final Thoughts

Income tax brackets indeed help to lower your tax, especially if you’re not yet earning a lot of money. In case you can't find all your receipts and get a lower tax accumulation (even if it's just by a few percentage points), then hiring an accountant can be beneficial.

Do you have an online business, but you are afraid to file your tax? If you need professionals, you can contact us at Unloop and let our team help you with your taxes. We partner with certified accountants for online businesses.

Give us a call at 877-421-7270 as soon as you can to learn more about our tax and accounting services.

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