Tax Brackets & Calculating Tax Payable |Ciccone McKay Financial Group Vancouver - wealth management, risk management, employee benefits and more

Unit 1 – Income Taxes

Lesson 2: Tax Brackets & Calculating Tax Payable

In Canada, there are two tax rates that influence the amount of money you take home, and how much goes to the ‘tax-man’.

There is the federal tax rates that apply to all Canadian taxpayers.
There is also the provincial or territorial tax rates that apply to the income that is earned in that specific province or territory.

It is key to note that the three bolded types of income mentioned in the last lesson are especially significant as they are the most common types of income earned through investing. Vittorio and I will dive into the key features of each form of income in two future articles.

Income Tax Brackets

In any case, to determine how much tax is owed, there are tiers in which your income falls into, and the tax rate increases as the amount of income earned rises. This is referred to as a Progressive Tax System, where the more income you earn, the more taxes will be applied to each additional bracket of income.

In the tables below, you can see the tax rate (percentage of income) that is owed for all income earned in each tier for a taxpayer who earns all of his or her income in the province of British Columbia. Both the federal and provincial tax brackets are adjusted each year, but usually reflect only minor changes.

Federal Tax Rates for 2020
15.00% on the first $48,535 of taxable income +
20.50% from $48,535.01 to $97,069 of taxable income +
26.00% from $97,069.01 to $150,473 of taxable income +
29.00% from $150,473.01 to $214,368 of taxable income +
33.00% of all taxable income over $214,368

*Reference: CRA – www.canada.ca

BC Provincial Tax Rates for 2020
5.06% on the first $41,725 of taxable income +
7.70% from $41,725.01 to $83,451 of taxable income +
10.50% from $83,451.01 to $95,812 of taxable income +
12.29% from $95,812.01 to $116,344 of taxable income +
14.70% from $116,344.01 to $157,748 of taxable income +
16.80% of all taxable income over $157,748

*Reference: Government of BC – www2.gov.bc.ca

Tax Credits

Both the Federal and Provincial governments will have certain credits that, if an individual qualifies for them, can lower one’s overall taxes. There are several credits that a taxpayer can qualify for, including the Child Fitness Credit or the BC Caregiver Credit. I will focus on only two in this article: the Basic Personal Amount allotted for the Federal and British Columbian taxes. Essentially, these amounts reflect the amount of income that a person can earn before being taxed at all.

In 2020, the Federal Basic Amount is either $13,229 or $12,298 (dependent on your income level) and the Provincial Basic Amount is $10,949. Essentially, you will not be taxed federally on your first $13,229 (or $12,298) of income, and you will not be taxed in British Columbia on the first $10,949 of income.

The Federal Basic Amount is determined by the following:

$13,229 for those whose net income for the year is less than or equal to the amount at which 29% tax bracket begins ($150,473 for 2020); or,
$12,298 for those whose net income for the year is greater than or equal to the amount at which the 33% tax bracket begins ($214,368 for 2020).

Example 1 - $125,000 of Gross Income in British Columbia

As an exercise, let’s break down the taxes owed for a Canadian who earns all of her $125,000 salary working for a company in British Columbia.

2020 Federal Tax Calculation - $125,000 Income
Earning Bracket	Tax Rate	Taxable Earnings This Bracket	Tax Due
$0 to $48,535	15.00%	X $48,535	= $7,280.25
+ $48,535.01 to $97,069	20.50%	X $48,534	= $9,949.47
+ $97,069.01 to $150,743	26.00%	X $27,931	= $7,262.06
+ $150,743.01 to $214,368	29.00%	X $0	= $0.00
+ all income over $214,368	33.00%	X $0	= $0.00
= Sub Total Tax Due		$125,000	= $24,491.78
- Personal Amount 2020 ($13,229)	15.00%	X $13,229	= $1,984.35
= Federal Tax Due 2020			= $22,507.43