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24.2.3 Taxation Of Income

Comprehensive guide on the taxation of income in Canada, detailing federal and provincial tax rates, calculations, and illustrations.

Overview

Understanding the taxation of income in Canada is crucial for financial planning and investment management. This section provides a detailed explanation of federal and provincial tax rates and how they apply to taxable income.

Federal Tax Rates

The basic tax rates are applied to different brackets of taxable income. The applicable federal tax rates for individuals in 2020 are shown in the table below (excluding tax credits).

Table A

Tax Rate Taxable Income Bracket
15% On the first $48,535 of taxable income
20.5% On the next $48,534 of taxable income (over $48,535 up to $97,069)
26% On the next $53,404 of taxable income (over $97,069 up to $150,473)
29% On the next $63,895 of taxable income (over $150,473 up to $214,368)
33% On taxable income over $214,368

Source: Adapted from Canada Revenue Agency

Note: The Canada Revenue Agency website (www.canada.ca/en/revenue-agency) should be consulted for current tax-related information.

Provincial Tax Rates

Currently, all provinces levy their own tax on taxable income. Provincial amounts are calculated in essentially the same way as federal tax. Adding the provincial rate to the federal rate gives the taxpayer’s combined marginal tax rate, which is the rate at which tax must be paid on each additional dollar of income earned.

Example: Calculation of Federal Income Tax

Let’s examine an example to better understand the tax calculations.

Example: Margaret’s employment income during 2020 was $155,000. She has no other sources of income and is a Canadian resident. Her federal tax (before credits are applied, and based on the rates in Table A) is $32,427.59, as shown in the Table B below.

Table B

Tax Rate Taxable Income Tax Payable
15.0% On the first $48,535 $7,280.25
20.5% On the next $48,534 $9,949.47
26.0% On the next $53,404 $13,885.04
29% On the next $4,527 $1,312.83
Total $155,000 $32,427.59

If Margaret were to earn an additional dollar, increasing her taxable income from $155,000 to $155,001, she would pay 29% federal tax on that dollar. In other words, her federal marginal tax rate is 29%.

Key Takeaways

  • Canadian income tax consists of both federal and provincial rates.
  • The federal tax rates are tiered based on income brackets.
  • The combined marginal tax rate includes both federal and provincial tax rates.

Frequently Asked Questions

1. What is a marginal tax rate?

The marginal tax rate is the rate at which tax is paid on each additional dollar of income earned. It applies to the highest portion of income earned within a given tax bracket.

2. How are provincial tax rates calculated?

Provincial tax rates are calculated in essentially the same way as federal tax rates. Each province has its specific tax brackets and rates, and these are added to the federal rates to determine a taxpayer’s combined marginal rate.

3. Where can I find the most up-to-date tax rates?

For the most up-to-date tax rates and tax-related information, visit the Canada Revenue Agency website at www.canada.ca/en/revenue-agency.

Glossary & Definitions

  • Marginal Tax Rate: The rate at which tax is paid on each additional dollar of income earned.
  • Tax Brackets: Ranges of income that are taxed at different rates.
  • Tax Payable: The amount of tax that is owed by the individual or entity.

Charts and Diagrams

To visualize how different incomes fall into various tax brackets, consider the following chart:

    pie
	    title Federal Income Tax Brackets (2020)
	    "15% on first $48,535" : 31500000
	    "20.5% on next $48,534" : 9950000
	    "26% on next $53,404" : 13885000
	    "29% on next $63,895" : 1312830
	    "33% over $214,368" : 1000000

This comprehensive overview serves as a valuable resource for understanding the essentials of income taxation in Canada, ensuring you are well-prepared for the Canadian Securities Course certification exam.


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Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

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markdown ## What is the federal tax rate for the first $48,535 of taxable income in 2020? - [ ] 20.5% - [ ] 26% - [ ] 29% - [x] 15% > **Explanation:** The federal tax rate for the first $48,535 of taxable income is 15% according to 2020 rates. ## What is the tax rate for the income bracket over $214,368 in 2020? - [ ] 29% - [ ] 15% - [ ] 20.5% - [x] 33% > **Explanation:** The tax rate for taxable income over $214,368 is 33%. ## Margaret’s income tax rate on her income between $97,069 and $150,473 is: - [ ] 20.5% - [ ] 29% - [x] 26% - [ ] 33% > **Explanation:** Income earned in the bracket between $97,069 and $150,473 is taxed at a rate of 26% in 2020. ## What is the federal marginal tax rate for an additional dollar earned by Margaret if her income is $155,000? - [ ] 33% - [x] 29% - [ ] 20.5% - [ ] 26% > **Explanation:** Since Margaret's taxable income is within the range of $150,473 to $214,368, any additional dollar will be taxed at a rate of 29%. ## How much federal tax does an individual pay on the next $48,534 of taxable income, within the bracket over $48,535 and up to $97,069 for 2020? - [ ] $7,280.25 - [x] $9,949.47 - [ ] $13,885.04 - [ ] $6,290.31 > **Explanation:** The tax payable on the next $48,534 in the bracket over $48,535 and up to $97,069 is $9,949.47. ## Which organization should be consulted for the most current tax-related information in Canada? - [ ] Department of Finance Canada - [x] Canada Revenue Agency (CRA) - [ ] Bank of Canada - [ ] Statistics Canada > **Explanation:** The Canada Revenue Agency (CRA) should be consulted for the most current tax-related information in Canada. ## What is the total federal tax payable by Margaret on her $155,000 income in 2020? - [ ] $28,135.76 - [x] $32,427.59 - [ ] $36,000 - [ ] $40,000 > **Explanation:** Margaret’s total federal tax payable on her income of $155,000 is $32,427.59, based on the tax rates provided. ## What tax rate applies to the portion of taxable income over $150,473 and up to $214,368 in 2020? - [x] 29% - [ ] 33% - [ ] 20.5% - [ ] 15% > **Explanation:** The tax rate on the portion of taxable income over $150,473 and up to $214,368 is 29%. ## How is the combined marginal tax rate calculated for an individual taxpayer? - [ ] By adding the average provincial rate to a fixed federal rate - [x] By adding the provincial rate to the federal rate - [ ] By calculating the mean rate of multiple provinces - [ ] By using the federal rate alone > **Explanation:** To calculate an individual’s combined marginal tax rate, you add the provincial rate to the federal rate. ## If an individual earns $214,369 in taxable income in 2020, at what rate will they be taxed for federal purposes on their next dollar earned? - [x] 33% - [ ] 26% - [ ] 20.5% - [ ] 29% > **Explanation:** Any income over $214,368 is federally taxed at a rate of 33%.

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Tuesday, July 23, 2024