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.
Ontario is an ideal province in which to start a business since it has the largest economy in Canada. Aside from that, the local government of Ontario offers several grant programs and tax incentives for businesses to encourage job openings and further economic growth.
If you are going to start a small business or take jobs in Ontario, you have to learn its income tax system. Tax laws are ever-changing, which makes understanding them even more difficult for small business owners and employees who are often too busy to keep up with tax updates.
Let us take a deeper look at Ontario’s income tax and how you can correctly compute your taxes.
Understanding Ontario’s Income Tax
Canada’s Taxation System
If you are a citizen in Canada who earns $49,020 or more, you are economically productive and thus mandated to pay federal tax income. If you live in Ontario in particular and earn $45,142 and more, you are also eligible to pay the provincial tax.
In that example, you can see that you need to pay two kinds of taxes to the Canadian government: federal and provincial. These two come hand in hand to promote the welfare of the country and its provinces. Compared to other countries, Canada has one of the highest income tax rates, with a reported highest income tax rate of 54%.
Canada has a progressive or marginal tax system. In this system, individuals pay higher taxes as their income grows. Canada also follows tax brackets for accurate tax derivation and to lessen the tax you need to pay.
As of 2021, the Canada Revenue Agency (CRA) implements the following federal income tax brackets:
- 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
How to Compute Your Income Tax
If you are earning $50,000, it is a common misconception that you have to pay 20.5%, equivalent to $10,250, in federal income tax.
Income tax preparation and computation do not work that way. The goal of the tax brackets is to lessen your total payable tax. Again, let us say you earn an annual net income of $50,000. You have a taxable amount of $49,020 on the first bracket, and you need to pay a 15% federal tax for that one, which is equal to $7,353.
We are not yet done because you are also eligible for the second bracket. Since we taxed the first $49,020 with 15%, you still need to pay a 20.5% tax on the remaining $980 ($50,000 − $49,020). The 20.5% payable federal tax of $980 is $200.90, which yields a total of $7,553.90 federal tax.
Now we need to compute your provincial tax. CRA applies the following Ontario income tax percentage:
- 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
Since you earn $50,000, you are eligible for the first and second brackets. After getting 5.05% of $45,142 ($2,279.67), you still have a remaining taxable income of $4,858 ($50,000 − $45,142), 9.15% of which is $444.51. Thus, your overall provincial tax is $2,724.18.
To accurately compute your provincial tax, you can use any Ontario income tax calculator available on the Internet.
Adding your federal and provincial taxes, you owe the Canadian government a total of $10,278.08. It leaves you with a $39,721.92 take-home income.
You must always file your income tax every April 30 of each year. However, CRA collects tax ahead of time, and you can see the tax deduction on your payslip.
According to the Ontario Income Tax Act, you are entitled to tax refunds if your employer withholds more than the amount of tax you need to pay. Also, you can use your Registered Retirement Savings Plan or pension contributions and tax credits, including dividends, donations, and small business capital credits, to lower your tax legally.
Calculating your federal and provincial taxes is very easy as long as you follow the proper computation. Tax calculators online can also help you compute the correct amount of taxes you need to pay.
Keep in mind that the taxes you pay the government help your business to grow as well. You need public utilities like roads and lights for your business needs. Also, you can benefit from other tax breaks, such as the depreciated value of a company vehicle, retirement contributions, and employee pay. Paying the correct business tax gives you a good credit rating, which attracts lenders and financial agencies.
We at Unloop work with partner accounting auditing and bookkeeping services to help you file your income tax hassle-free. Call us today at 877-421-7270 to learn more about our tax and accounting services.