Just like many other countries across the globe, Canada has a taxation system in place to collect money from individuals as well as businesses. The Canada Revenue Agency (CRA) manages this taxation system. The money collected from income tax is used for various government services and schemes. Some of them include healthcare, maintenance and development of roads, cultural activities, employment programs, etc.
The income tax rates in Canada differ according to the income you earn. You would be required to pay different income tax rates on different portions of income you earn. The Canadian taxation system is a progressive one. This means that individuals who earn a lower income are charged a lesser percentage, while those who earn higher are charged a higher percentage. In simple words, the more money you earn, the more taxes you will have to pay.
If you are living in Canada, you would be required to pay both federal taxes as well as provincial taxes on your income. The amount of tax you pay depends on your taxable income. The rate of tax you pay goes higher if your taxable income increases and exceeds certain specified amounts known as tax brackets.
The Tax brackets, also known as Tax Slabs in Canada for 2020 are as follows:
- 15% on the first $48,535 of taxable income.
- Moreover, 20.5% on the next $48,534 of taxable income (on the portion of taxable income over 48,535 up to $97,069), plus
- 26% on the next $53,404 of taxable income (on the portion of taxable income over $97,069 up to $150,473), plus
- 29% on the next $63,895 of taxable income (on the portion of taxable income over 150,473 up to $214,368), plus
- 33% of taxable income over $214,368
From the above Federal tax rate brackets it is quite evident that the more you earn the more taxes you are required to pay.
In addition to Federal tax, Canadians are required to pay taxes to the government of the province or territory in which they live. Different provinces have different tax rates. Quebec is an exception to this as it has its own income tax rules.
The amount of money you are liable to pay to the Canadian government as tax is your tax liability.
Paying taxes, being an employee and earning a paycheck every month is totally different from being self-employed. If you are a salaried individual, the company that you work for is responsible for deducting the tax and paying it on your behalf. So, you hardly have to worry about anything. In most cases, for salaried individuals, they don't have any tax liability when they file the returns. In case they are eligible for credits and tax deductions, there is a tax refund that happens. Salaried individuals can easily calculate their tax liability/refund using a simple tax calculator.
However, things are not so easy for the self employed and business class individuals in Canada since the tax calculation can get quite complicated.
Federal tax for businesses
If you own a business, the amount of tax liability of your business depends on the type of entity it is. There are different types of business entities that exist. These include C corporations, partnership, sole proprietorship.
If you own a C corp, then your business is taxed twice as per the current tax system. One at the business level and the other at the personal (individual) level.
Consider the following example.
If Daniel's Cake Basket Inc. distributed the two million CAD earned as profit to the owners, then federal tax would be applicable to the CAD 2 million earned as profit at the corporate level payable by the business as well as on the amount distributed as profit at the shareholder level. This is double taxation. At present, if you own a C corp, there will be a flat rate of 21 percent, irrespective of the taxable income your business has.
In case your business is a flow through entity, you would be responsible for paying the taxes yourself, instead of the business entity.
Tax calculator: An effective means to calculate Income tax
A Canada tax calculator is an effective tool for calculating the income tax at an individual level. The tax calculator is a real blessing for those who wish to file their tax returns on their own. There are separate tax calculators available for calculating Federal tax and Provincial tax as well.
The Canadian tax slabs keep changing frequently. Using a Canada tax calculator makes the entire process of tax calculation extremely easy, convenient, and hassle-free.
Payroll calculator: A blessing for businesses
If you own a business and have employees working for your organization, a payroll calculator enables you to know the exact amount that has to be deducted from an employee's salary as tax. The payroll calculator is an effective tool that lets you calculate the monthly take-home pay for your employees.