Why we pay income tax
Income tax funds public services: health care, schools, roads, defence and social programs. In Canada, both the federal government and the provinces/territories charge income tax.
A progressive system
Canada uses a progressive tax system: income is divided into tax brackets, and each bracket is taxed at its own rate. Higher income is taxed at higher rates, but only the part of income inside each bracket gets that bracket’s rate.
How brackets work (simplified example)
These are illustrative brackets, not current official rates.
| Bracket | Income range | Rate |
|---|---|---|
| 1 | $0 – $50,000 | 15% |
| 2 | $50,000 – $100,000 | 20% |
| 3 | over $100,000 | 26% |
Example: Income of $70,000
- First $50,000 × 15% = $7,500
- Next $20,000 × 20% = $4,000
- Total tax: $11,500
The marginal tax rate is 20% (the rate on the last dollar), but the average rate is 11,500 ÷ 70,000 ≈ 16.4%.
A common myth
"If I get a raise into the next bracket, I’ll take home less." False. Only the dollars above the bracket line are taxed at the higher rate. A raise always increases take-home pay.
Deductions and credits
- A deduction (like RRSP contributions or union dues) lowers taxable income.
- A credit (like the basic personal amount) lowers the tax itself.
Everyone gets a basic personal amount: the first several thousand dollars of income are effectively tax-free.
Tax returns
Each spring, Canadians file a tax return for the previous year. Employers have already deducted tax from each paycheque, so the return settles the difference:
- Too much deducted → refund
- Too little → balance owing
Filing also qualifies people for benefits like the GST/HST credit and the Canada Child Benefit, even with low income.
Worked examples
Using the simplified brackets above:
Example 1: Income $40,000 → 40,000 × 15% = $6,000.
Example 2: Income $120,000 → 7,500 + 10,000 + (20,000 × 26%) = 7,500 + 10,000 + 5,200 = $22,700.
Example 3: Marginal rate for $85,000? 20%.
Common mistakes
- Applying the top rate to all income.
- Confusing marginal and average rates.
- Thinking deductions and credits are the same.
Try it yourself
Using the simplified brackets:
- Tax on $30,000?
- Tax on $60,000?
- Average tax rate on $60,000?
- If income rises from $49,000 to $51,000, does take-home pay go down?
Answers: 1) $4,500 2) $9,500 3) about 15.8% 4) No; only the $1,000 above $50,000 is taxed at 20%.
Quick recap
- Income tax in Canada is a progressive tax with tax brackets.
- The marginal tax rate applies only to income in the top bracket.
- File a tax return each year to settle refunds or balances owing.