Understanding Canadian Income Tax

In Canada, it's your residence status, not citizenship, that determines how you're taxed. You can be categorized as an ordinarily resident, a non-resident, or an immigrant/emigrant for tax purposes.

Taxclinics.ca

8/22/20241 min read

How Does Canadian Residence Status Affect Income Tax?

🗣️In Canada, it's your residence status, not citizenship, that determines how you're taxed. You can be categorized as an ordinarily resident, a non-resident, or an immigrant/emigrant for tax purposes.

Note: Tourists or visitors who do not earn any income in Canada are not required to file taxes.

What's the Self-Assessment System?

🗣️In Canada, by law, you calculate your own taxes and file an income tax return each year.

How does it work?

🗣️You figure out your yearly taxable income and the tax owed. If you've overpaid, you get a refund; if not, you pay the balance.

What is Canada's Progressive Tax System and What Are the 2022 Federal Tax Rates?

🗣️In Canada, the tax rates increase as your income rises, which is known as a "progressive" tax system. For 2022, the federal tax rates are as follows:

  • 15% on income up to $50,197

  • 20.5% between $50,197 and $100,392

  • 26% between $100,392 and $155,625

  • 29% between $155,625 and $221,708

  • 33% on income above $221,708

Is the tax levied individually or on a family basis?

🗣️The tax is calculated individually, not based on a family's combined income. This means that a family where one spouse earns $80,000 (for example) will pay more in taxes than a family where each spouse earns $40,000, even though the total family income is the same,example below:

Scenario 1: One earner at $80,000

  • The first $50,197 is taxed at 15%

  • 50,197×15%=7,529.55

  • The remaining $29,803 is taxed at 20.5%:

  • 29,803×20.5%=6,109.62

  • Total tax:

  • 7,529.55+6,109.62=13,639.17

Scenario 2: Two earners at $40,000 each

  • The income of $40,000 falls within the first bracket, so it's taxed at 15%:

  • First earner : 40,000×15%=6,000

  • Second earner: 40,000×15%=6,000

  • Total tax for both:

  • 6,000+6,000=12,000

Conclusion

🗣️In both scenarios, the total family income is $80,000. However, the tax liability differs. For the single-earner family, the tax is $13,639.17, whereas for the dual-earner family, it's $12,000. The single-earner family ends up paying $1,639.17 more in taxes.