Canada Taxes 2022: Federal Tax Brackets, Rates and Credits

To read more chapters, click below:

Chapter 1: 10 tax benefits that low-income Canadians should be aware of

Chapter 2: Applying for Canada Workers Benefit

Chapter 3: How to apply for GST/ HST credit in 2023?

Chapter 4: All you need to know about Canada Child Benefit

Chapter 5: 8 ways in which Canada’s New Affordability Plan helps make life cheaper for you

Chapter 6: All that you need to know about Canada Dental Benefit

Chapter 7: Ontario – Income Tax Brackets, Rates, & Provincial Tax Credits

Chapter 8: Quebec – income tax brackets, rates, and provincial tax credits

Chapter 9: Understanding the Tuition Tax Credit in Canada: All You Need to Know

Chapter 10: Understanding Canada Training Credit

Chapter 11: Maximizing Your Tax Return: Uncovering the Benefits of Seniors' Tax Credits in Canada

To understand Canadian personal income tax calculation, you need to first understand the different income levels. The tax brackets keep changing every year, so it is best to have the most accurate information.

In this chapter, you'll gain insights into the 2022 tax brackets and their corresponding rates, how they function, and the potential tax liability associated with your income level and place of residence. Subsequently, we'll explore strategies to maximize your tax credits, ultimately helping you minimize your tax burden and possibly move into a lower tax bracket.

Points to remember

• The Canada Revenue Agency (CRA) establishes tax brackets to ascertain your annual personal income tax obligations.
• Canadian citizens contribute income tax to both the federal government and the provincial or territorial government of their place of residence.
• Credits and deductions serve as common techniques for diminishing your owed taxes and enhancing potential tax refunds.

What are tax brackets?

The Canada Revenue Agency (CRA) establishes tax brackets to calculate your annual personal income tax liability. These tax brackets pertain to the income you earn within specified minimum and maximum thresholds, known as tax rates. Canada's federal income tax system, which is administered by the Canada Revenue Agency (CRA), includes several tax brackets that determine the amount of income tax individuals or families owe based on their taxable income. Tax brackets are subject to change with each new federal budget or legislative update.

In simpler terms, a tax bracket denotes the tax percentage applied to a specific income range. These percentages are applied to your taxable income, which is the total income from Line 15000 minus any eligible deductions you may have.

These tax brackets are progressive, meaning that as your income increases, you move into higher tax brackets, and the applicable tax rate increases accordingly.

Provinces and territories in Canada also have their own tax brackets and rates, which can vary. Some provinces and territories have a single tax rate, while others have a progressive tax system similar to the federal government. Be sure to check the specific tax brackets and rates for your province or territory when calculating your total income tax liability.

Canada’s federal income tax rates for the year 2022

Why does your tax bracket matter?

Understanding your position within the tax brackets is crucial for comprehending shifts in your income tax liability. For instance, embarking on a side hustle or earning additional income that propels you into a higher bracket may elucidate any tax owing or discrepancies in your refund compared to the previous year.

Moreover, your placement in specific tax brackets can inform your choices regarding the timing and method of claiming specific deductions and credits, offering opportunities for strategic financial decisions.

Understanding the Mechanics of Canada's Personal Income Tax Brackets

Canada's personal income tax system operates on a progressive tax bracket system. This means that as your income increases, you move into higher tax brackets, and the corresponding tax rate applied to your income also increases. Here's how Canada's personal income tax brackets work.

• Taxable Income Calculation

To determine your income tax, you start by calculating your taxable income. This involves adding up all your sources of income, such as employment income, rental income, investment income, and more. From this total, you subtract any eligible deductions, credits, and exemptions. The result is your taxable income.

• Tax Brackets

Once you've determined your taxable income, you'll refer to the federal and provincial or territorial tax brackets. Each has its own set of brackets and tax rates. The federal government sets tax brackets for the entire country, while provinces and territories have their own tax brackets that are added on top of the federal tax.

• Progressive Tax Rates

Canada's tax system has several tax brackets, each with its own tax rate. The first portion of your income is taxed at a lower rate, and as your income increases, you move into higher tax brackets with higher rates. 

• Provincial/Territorial Tax

In addition to federal taxes, you will also pay provincial or territorial income taxes based on your income and where you live. These taxes have their own set of brackets and rates, and they are calculated in a similar progressive manner to the federal tax.

• Tax Calculation

To calculate your income tax liability, you apply the appropriate federal and provincial or territorial tax rates to the corresponding portions of your taxable income based on the brackets. The result is your total income tax liability for the year.

• Tax Credits and Deductions

After determining your income tax liability, you can reduce it through various tax credits and deductions for which you may be eligible. These can include things like the Canada Child Benefit, tuition and education credits, and charitable donation deductions.

• Final Tax Owed or Refund

If your total income tax liability is greater than the taxes already withheld from your paychecks throughout the year, you'll owe additional tax. If it's less, you'll be entitled to a tax refund.

What are marginal taxes in Canada?

The marginal tax rate is the percentage at which you are taxed on the next dollar of income you earn. In Canada, taxpayers' incomes are divided into multiple federal and provincial or territorial tax brackets. Each bracket is associated with a specific tax rate, and the income within each bracket is taxed at that rate.

Your marginal tax rate is determined by the highest tax bracket into which a portion of your income falls. As your income increases and falls into higher tax brackets, your marginal tax rate also increases. Consequently, you pay a higher tax rate on the income that falls within these higher brackets. Your marginal tax rate applies to both the last dollar you earned and the immediate additional dollar of income.

Canada has federal, provincial, and territorial income tax rates that apply to four main categories of personal income: capital gains, eligible dividends, ineligible dividends, and employment or self-employment income. Each of these categories may have its own set of tax rates and rules.

Difference between average and marginal tax rate in Canada

In Canada, the average tax rate and the marginal tax rate are two different measures used to calculate the amount of income tax individuals owe. Here's how they differ.

Average Tax Rate

• The average tax rate is also known as the effective tax rate.
• It represents the total income tax paid as a percentage of your total income.
• To calculate the average tax rate, you divide your total tax paid by your total income.
• This rate gives you an overall view of the portion of your income that goes toward income tax.
• It does not consider how your tax liability changes as your income increases.
• Formula for Average Tax Rate: (Total Tax Paid / Total Income) x 100

Marginal Tax Rate

• The marginal tax rate is the tax rate applied to the last dollar of income you earn.
• It represents the rate at which you would be taxed on an additional dollar of income.
• Canada's tax system is progressive, meaning that as your income increases, you move into higher tax brackets, and the marginal tax rate on each additional dollar may be different.
• Knowing your marginal tax rate is crucial for tax planning because it helps you understand how an increase in income or a deduction will affect your taxes.

In Canada, the marginal tax rate can vary depending on the type of income (e.g., employment income, capital gains, dividends) and your province or territory of residence. The highest marginal tax rate is typically applied to the highest income earners.

The average tax rate provides an overall picture of your tax burden as a percentage of your total income, while the marginal tax rate indicates the tax rate on the next dollar of income you earn and helps you understand how changes in income may impact your taxes.

Combined federal and provincial tax rates in Canada

Combined federal and provincial or territorial tax rates in Canada can vary significantly depending on your province or territory of residence and your level of income. As of my last knowledge update in September 2021, I can provide a general overview, but please note that tax rates can change from year to year, so it's essential to check with the Canada Revenue Agency (CRA) or your provincial/territorial tax authority for the most up-to-date information. Here is a general idea of combined federal and provincial/territorial tax rates for some provinces and territories.

1. Ontario: The combined federal and provincial tax rates in Ontario are progressive and can range from approximately 20.05% to 53.53% for the highest income earners.
2. Quebec: Quebec has its tax system, and combined tax rates can range from around 24.22% to 53.31%.
3. British Columbia: Tax rates in British Columbia can range from about 20.06% to 53.50%.
4. Alberta: Alberta has a flat tax rate at the provincial level, which was approximately 10% for the highest income earners. However, please note that Alberta introduced a new progressive tax rate for high-income earners starting in 2021.
5. Manitoba: The combined federal and provincial tax rates in Manitoba can range from around 25.80% to 50.40%.
6. Saskatchewan: Tax rates in Saskatchewan can range from approximately 23.81% to 48.00%.
7. Nova Scotia: Nova Scotia has combined tax rates that can range from about 21.00% to 54.00%.
8. New Brunswick: Tax rates in New Brunswick can range from around 22.06% to 53.30%.
9. Prince Edward Island: The combined federal and provincial tax rates in PEI can range from approximately 23.37% to 51.37%.
10. Newfoundland and Labrador: Tax rates in Newfoundland and Labrador can range from about 22.63% to 51.30%.

Provincial tax bracket rates for the year 2022

1. Alberta

In Alberta, a progressive tax structure is in place, where distinct tax rates are applied to specific income ranges. Notably, Alberta boasts the highest basic personal amounts (BPA) in all of Canada. In the 2022 tax year, Alberta's basic personal amount stands at $19,369, surpassing the federal basic personal amount of $14,398.

2. British Columbia

British Columbia's tax system aligns with those of other Canadian provinces, with several provincial taxes and credits that complement their federal counterparts. However, there are distinctive credits specifically tailored for British Columbia residents.

Within British Columbia's tax framework, a progressive income tax structure is employed, featuring seven tax rates. These tax brackets are subject to annual adjustments to accommodate inflation.

3. Manitoba

In Manitoba, a progressive income tax system is in place, featuring just three tax rates or brackets. To compute Manitoba's tax liability, individuals employ Form MB428, which also accounts for non-refundable tax credits. Your taxable income is determined by subtracting federal deductions, such as the RRSP deduction and childcare expenses, from your total income.

4. Newfoundland and Labrador

Newfoundland and Labrador employ a progressive tax system. Your taxable income is calculated as your total income minus federal deductions such as the RRSP deduction and childcare expenses. For optimized eligibility for specific credits, it's essential to review Newfoundland and Labrador's provincial tax credit offerings.

5. New Brunswick

In New Brunswick, an ascending tax system is implemented, featuring a division into five tax categories. To compute New Brunswick's tax obligations, individuals utilize Form NB428, which also considers non-refundable tax credits. The rate at which you are taxed can fluctuate based on your annual income level, resulting in varying tax rates for different earnings in a given year.

6. Northwest Territories

In the Northwest Territories, a progressive tax system is in effect, featuring four tax categories. These tax brackets are adjusted annually to account for inflation.

7. Nova Scotia

Here’s a breakdown of Nova Scotia tax brackets for the year 2022.

8. Nunavut

Nunavut employs a graduated tax system with four distinct tax brackets. The federal basic personal amount (BPA) stands at $14,398, while Nunavut's equivalent amount is $16,862.

9. Ontario

Like the majority of provinces, Ontario implements a progressive tax system, and its residents are required to file annual income tax returns. The amount Ontario residents owe in taxes is determined by their income level and the tax bracket they belong to.

10. Prince Edward Island

Prince Edward Island employs a progressive tax system featuring just three tax brackets. In the 2022 tax year, the federal basic personal amount (BPA) stands at $14,398, while Prince Edward Island's equivalent is $11,250. Additionally, there are specific tax credits available to residents of Prince Edward Island, adding a unique aspect to their tax system.

11. Quebec

Québec stands out as the sole province in Canada where residents are required to submit two distinct tax returns—one at the federal level (T1) to the CRA and another at the provincial level (TP1) to Revenu Québec (RQ). This distinctive arrangement involves its own set of forms and schedules, along with specific regulations that are applicable exclusively within this province.

12. Saskatchewan

Saskatchewan employs a progressive tax system featuring just three tax brackets. These brackets are adjusted annually to account for inflation. Your taxable income in Saskatchewan is calculated by deducting federal allowances, such as the RRSP deduction and child care expenses, from your total income. Residents of Saskatchewan can benefit from a variety of distinct tax credits tailored to their specific circumstances.

13. Yukon

Yukon employs a progressive tax system featuring five tax brackets. In the 2022 tax year, both the federal basic personal amount (BPA) and Yukon's base amount stand at $14,398, ensuring consistency in this regard. Moreover, residents of Yukon can take advantage of special tax credits tailored to their specific needs and circumstances.

How can I get into a lower tax bracket in Canada?

Lowering your tax bracket in Canada involves various strategies that aim to reduce your taxable income or take advantage of tax deductions, credits, and exemptions. Here are some ways to potentially lower your tax bracket.

• Contribute to Registered Retirement Savings Plans (RRSPs)

Contributing to RRSPs can lower your taxable income for the year. Contributions are tax-deductible, and the money in your RRSP grows tax-deferred until you withdraw it in retirement.

• Use Tax-Efficient Investments

Consider investing in tax-efficient vehicles like Tax-Free Savings Accounts (TFSAs) and Canadian dividends. They can provide tax advantages and potentially lower your overall tax liability.

• Employment Expenses

If you have eligible employment expenses, you may be able to deduct them from your income. Keep records of work-related expenses like supplies, home office expenses, or job-related courses.

• Maximize Tax Credits

Take advantage of tax credits for which you qualify, such as the Canada Child Benefit, the GST/HST credit, or the Canada Workers' Benefit. These credits can directly reduce your tax payable.

• Split Income

If you have family members in lower tax brackets, consider income-splitting strategies like pension income splitting, spousal RRSP contributions, or setting up a family trust.

• Invest in Tax-Efficient Funds

Opt for investments that generate capital gains rather than interest income, as capital gains are taxed at a lower rate.

• Charitable Donations

Donating to registered charities can earn you tax credits, reducing your taxable income. Keep track of your charitable contributions and claim them when you file your taxes.

• Utilize Tax Credits for Education

If you or your dependents are pursuing post-secondary education, claim eligible tuition and education credits.

• Timing of Deductions

Strategically time certain deductions and expenses, such as medical expenses or charitable contributions, to maximize their impact on your tax return.

• Seek Professional Advice

Consult a tax professional or financial advisor for personalized tax planning advice based on your unique financial situation.