Which Tax Bracket Are You In?

Terry Fong

Filed under: Taxes

Income tax in Canada is a progressive tax system. Sadly, the more we make, the more taxes we pay on additional income. This is based on the principle that the higher our income, the more able we are to pay taxes.

The marginal tax rate is the rate assessed against the income at the margins of your income. This does not increase the tax rate on all income earned, but only on additional income. The marginal tax rate is useful for determining the effectiveness of various tax strategies like your Registered Retirement Savings Plans (RRSP) and Tax Free Savings Accounts (TFSA). It also tells you how much to expect from any raise.

The average tax rate is simply the total of all taxes paid divided by the total income. This value is informational only, and has no official use.The federal tax brackets for 2010 and 2011 are as follows:

Rates	2010 Tax Bracket	2011 Tax Bracket
15%	$0-$40,970	$0-$41,544
22%	$40,970-$81,941	$41,544-$83,088
26%	$81,941-$127,021	$83,088-$128,800
29%	$127,021+	$128,800+

For 2011, there was a 1.4 percent cost of living adjustment from the tax brackets from 2010.
For example, if you earned $42,000 in 2010, you would owe $40,970x15%+$1,030x22% or $6,372.10 in taxes. This is an average tax rate of 15.17%, and a marginal tax ate of of 22% for 2010.

Provincial and territorial rates
The rates above cover only federal income tax. The provinces and territories also have their own taxes. They have different rates and tax brackets from the federal rates. This also needs different forms and calculations for taxable income. The general principles are the same.
Provincial income tax rates vary from a low of four percent, up to as high as 21 percent (on $150,000+ in Nova Scotia). All provinces except Alberta have their own tax brackets. Alberta applies a flat tax rate of ten percent. The combined tax brackets make for a more complicated picture; as an example, the combined federal and provincial rates for Ontario in 2010 are:

Rate	2010 Tax Bracket
15.00%	$0-$13,022
25.10%	$13,023-$17,101
20.05%	$17,102-$37,106
24.15%	$37,107-$40,970
31.15%	$40,971-$65,344
32.98%	$65,345-$74,214
35.39%	$74,215-$76,986
39.41%	$76,987-$81,941
43.41%	$81,942-$127,021
46.41%	$127,022+

(adapted from Ernst & Young Ontario 2010 rate card (PDF))

Someone living in Ontario who made $42,000 in 2010 would owe a total of $8,241.13 in taxes, $6,372.10 to Ottawa and the rest to Ontario. While the marginal rate is 31.15%, the average tax rate is only 19.6%. After tax income would be $33,758.57.

The federal government collects income tax for all provinces and territories except Quebec. Quebec residents need to file a provincial return in addition to the federal return.

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