Learn about your taxes: The one about tax rates

Narrator: Have you been offered a new job, or a raise at work? Did someone say: “watch out for those tax rates and tax brackets - you’ll make less money”? Are you confused? Well, don’t fret!

Whether you’re starting your first part-time job as a student, starting a full-time job, or just thinking about a pay raise - we’re here to help.

We’ll show you how tax rates in Canada work, and clear up some of the confusion about them.

Tax rates are the percentage of income you pay to federal and provincial, or territorial, governments when you do your taxes.

Canada’s tax system uses ‘marginal’ tax rates, which means you pay more tax as your income increases. The tax rates are split up into ‘brackets’, and the taxes you pay are based on which of the tax brackets your income falls into, and where you live in Canada.

Don’t worry, to help you understand, let’s show you how the federal tax rates in 2022 could have affected your taxes.

These were the tax rates in 2022. The tax rates are: 15%, 20.5%, 26%, 29%, and 33%.

Let’s say you’re a student who worked part-time over the winter and spring, and you made $10,000. Your income would be in the first bracket, and your tax rate would be 15%.

Now, what if you also worked full-time in the summer, and your income at the end of the year increased to $30,000? Even though you made more money, you still fall into the 15% bracket because the limit is $50,197.

Here’s what happens when you move up a bracket. Let’s say you work full-time all year, and earn $52,000. But wait, your income went above $50,197! So, are you in a new tax bracket?

Here’s where we need to clear things up. A lot of people think that once they move up in rates, all of their taxable income falls into this higher rate. Well, we’ve got good news - this is wrong! Only the additional amount of taxable income you made in the next bracket gets taxed at the higher rate.

So if you made $52,000, only $1,803 of it will be taxed at 20.5%. The first $50,197 you made will still be taxed at 15%.

This applies to all the higher tax brackets, too. If you get a big raise and now earn $105,000, only $4,608 of that income is taxed at 26%. The first $50,197 you made is still taxed at 15%, and the next $50,195 after that is taxed at 20.5%.

What if you choose to sell some shares of a company that your parents bought you 20 years ago, and your income for the year shoots up to the last bracket? The same rules apply, but any income you earned over $221,708 will be taxed at 33% - whether that’s $230,000, $1,000,000, or even more.

Well, there you have it! The basics of how tax rates work in Canada. The last thing to know is that these tax rates can change each year, and remember that provinces and territories have their own rates, with different brackets and income amounts.

I hope this cleared things up for you. And, yes, take that pay raise! You deserve it!

Follow us on social media and go to canada.ca for more tax information.