This week, our question comes from 24-year-old Allie, who asked for a breakdown and examples of how tax brackets work in Canada.
#MakeItMakeSense is a series from the Star that breaks down personal finance questions to help young Canadians gain more confidence and understanding around financial literacy.
Tax brackets are created by the Canada Revenue Agency to determine how much money you need to pay in personal income tax every year. Each of those tax brackets have a specific tax rate that is applied depending on the range of income. For instance, Moorhouse points to an example of someone living in Ontario who is making under $46,226. Under that income range, the federal tax rate would be 15 per cent and the provincial tax rate would be 5.05 per cent. In total, that individual’s marginal tax rate would be 20.05 per cent, explained Moorhouse.
“Average tax rate is really how much you're paying. Marginal tax rate is really to show what's the highest level of tax you're paying,” she said.“I feel like a big misconception is some people are afraid to earn more because they’re afraid of getting into a higher tax bracket and think the extra income they earn is going to be wiped out by taxes,” said Moorhouse.
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