What are the Canadian income tax brackets?
Canadian tax brackets are income ranges that determine how much tax you will have to pay based on which tax bracket you fall under. For every tax bracket, there is a lower and upper limit and a tax rate. People with lower income pay a lower tax rate than people with a higher income. There are five income tax brackets and is based on your taxable income, which is your total income minus allowable deductions and exemptions.
| 2021 Federal income tax brackets* |
2021 Federal income tax rates |
| $49,020 or less |
15% |
| $49,020 to $98,040 |
20.5% |
| $98,040 to $151,978 |
26% |
| $151,978 to $216,511 |
29% |
| More than $216,511 |
33% |
* These amounts are adjusted for inflation and other factors in each tax year.
What are tax credits and deductions?
In Canada, a tax credit reduces the amount of tax you owe. When it comes to your tax credits and deductions, it’s important to understand what can be deducted from your tax base to ensure that your net worth does not get reduced by overpaying for taxes. There are refundable and non-refundable tax credits, where a refundable credit will deposit the excess amount back into your account if your credits exceed your tax bill. For a non-refundable tax credit, you will not be refunded the unused credits.
A tax deduction reduces your taxable income. Sometimes deductions can be rolled over into future years, which can be useful in years where you have high taxable income so you can lower your taxable amount.
What are the types of tax credits in Canada?
Home Buyers’ Amount
The home buyers’ amount is a non-refundable $5,000 tax credit for first-time home buyers.
Home Renovation Tax Credit
In Canada, there are many provinces that allow senior homeowners and those living with them to receive a tax credit when they make renovations to their home to help with accessibility. There are also some provinces that provide a tax credit when renovations include green energy equipment.
What are the types of tax deductions in Canada?
RRSP contributions
You can reduce your taxable income when you contribute to your RRSP, you can only contribute up to 18% of your income a year.
RRSP first time home buyers incentive
If you are a first time home buyer, you can take advantage of this deduction for a tax free option to fund your down payment.
Mortgage payments
As a landlord, you are able to deduct mortgage interest and depreciation from your rental property income. As a homeowner, you can use the Smith Maneuver to deduct HELOC interest payments while investing the proceeds. The Smith Maneuver allows you to borrow from your home equity to generate income through investments. It will make your mortgage interest payments tax deductible and can then be used to pay off your mortgage faster with higher tax refunds.
For example:
If you borrow money from your home equity to invest in capital property that generates income, you are able to claim the interest that you paid on your tax return.
Child care expenses
If you are a Canadian guardian living with a child under your care, there are eligible expenses that can be deducted.
Moving expenses
If you have moved closer to your work or school (at least 40km) you might be eligible to deduct qualifying moving expenses from your income.
For more information about tax deductions and tax credits, you can speak to your accountant or a tax professional to learn more.
How is my tax money spent by the Government?
When Prime Minister candidates announce their platform while running for election, they will often share how they intend to spend tax revenue throughout their term. When an elected government is chosen, they have the most considerable impact on how your tax payments are used. Here are the different political parties in Canada and their main focuses when it comes to spending tax money:
Bloc Quebecois
This is a federal political party in Canada devoted to Quebec nationalism and the promotion of Quebec sovereignty.
Conservatives
The Conservative party focuses on decreasing government spending and reducing the amount of tax revenue required which can result in tax breaks and cuts.
Green party
The Green party focuses on the environment and sustainability and has proposed to increase ecological protection and increasing corporate tax.
Liberals
The Liberal party mainly focuses on improvements to housing and child care. They are partnered with the New Democratic Party (NDP) to influence governmental policy as there is no single party that has a majority government in the House of Commons currently.
New Democratic Party (NDP)
The NDP is actually partnered with the Liberal party and must work together to pass bills. They focus on increases in healthcare and climate change initiatives as well as indigenous reconciliation. They have proposed to increase the corporate tax rate from 15% to 18% and increase the capital gains inclusion rate from 50% to 75%
What is the CPP and how does it work?
The Canadian Pension Plan (CPP) is a mandatory public retirement plan that is run by the Government. It is a monthly, taxable benefit that replaces part of your income when you retire. You must apply as the payments are not automatic. You must be at least 60 years old to qualify and have made at least one valid contribution to the CPP. A valid contribution can be either from work you did in Canada or can be a result of receiving credits from a former spouse or common law partner at the end of the relationship. Your contributions are also based on your earnings.
The amount of pension you receive each month will be based on your average earnings throughout your working life, your contributions and the age you start your retirement pension.
You can start receiving your pension earlier at the age of 60 but the monthly amount will be smaller, as it will be permanently reduced at a rate of 0.6% for each month before you turn 65 which will be a total of 36%. You can also start at a later age of 70 and you could receive more but the maximum monthly amount you can get is reached when you turn 70, which is a maximum increase up to 42%. The average age people start their pension is 65. There are other factors to consider such as time off from work to care for children that will be considered to your pension.
Are there CPP tax deductions?
You can claim a 15% tax credit for your base CPP contribution and a tax deduction for your enhanced CPP contribution if you are an employee. If you are self-employed, you can claim a 15% tax credit on half of your base CPP contribution and a tax deduction on the other half of your base CPP contribution. A tax deduction is also possible on your enhanced CPP contribution.
The base portion of CPP is calculated on earnings between the year’s minimum and max amounts of pensionable earnings. The contribution rate is 9.9% (4.95% from the employed and 4.95% from the employee)
The enhanced portion of CPP provides a top-up to the base and was introduced in 2019. The first additional portion is calculated on the same range of earnings as the base and has a contribution rate of 2%.
