A tax deduction is a deduction that reduces a person’s or organization’s tax burden by reducing their taxable income. Deductions are usually the expenses incurred by a taxpayer during the year that can be claimed or deducted from gross income to find out the amount of tax due.
|Federal tax deduction||– $5,768|
|Provincial tax deduction||– $3,046|
|CPP deduction||– $2,807|
|EI deduction||– $869|
|Total tax||– $12,490|
|Marginal tax rate||34.3%|
|Average tax rate||22.7%|
If you earn $ 55,000 a year living in Ontario, Canada, you will be taxed at $ 12,490. This means your net salary will be $ 42,510 per year or $ 3,542 per month. Your average rate is 22.7%, and your marginal rate is 34.3%. This marginal rate means that your immediate additional income will be taxed at that rate. For example, a $ 100 salary increase will be taxed at $ 34.33, so your net salary will only increase by $ 65.67.
In addition to the federal income tax, provincial or territorial income tax must be calculated and paid. In addition to federal credits, you may also be entitled to provincial or territorial credits. Provincial and territorial governments are developing their own tax laws and policies; however, the Canada Revenue Agency (CRA) collects and administers individual income taxes on behalf of provincial and territorial governments (excluding the province of Quebec). The CRA also manages various provincial and territorial programs. As an ex-pat, you may be limited in the amount you can apply to certain provincial or territorial non-refundable tax credits. If you have reduced your entitlement to certain non-refundable federal tax credits, you must reduce your entitlement to the corresponding provincial or territorial non-refundable tax credit in the same way.
The CPP earnings cap is set each January based on the average salary increase in Canada. In 2019, the maximum CPP earnings limit was $57,400. If you are self-employed, you pay a full 10.2%. Your contributions are based on your net business income (after expenses). The contribution rate for this retirement income is 10.2% (9.9% for the basic or original CPP and 0.3% for the CPP improvements, which started on January 1, 2019); the contribution is split equally between the employee and the employer. The maximum basic CPP contribution for employers and employees in 2019 is $ 2,748.90. For the ones who are self-employed, the maximum contribution is $ 5,497.80.
As an employee, some of you may notice that your paychecks are lower at the start of the year, in part due to deductions from EI. Once you reach the maximum total deductions for a given year, no further EI will be deducted from your salary. The more you earn, the less time it will take to pay the full premium. For most people, the base rate for calculating EI benefits is 55% of the average insurable weekly wage, up to a maximum. Once this maximum amount is reached, there will be no more EI deductions for the year.
EI rate: EI = (gross salary x * % = z)
In April 2020 alone, 2 million Canadian jobs were lost, with the unemployment rate jumping to 13%. Of course, these are unprecedented times and don’t really reflect the number of unemployed in Canada. As mentioned, EI is clearly something many Canadians turn to at a time when they lose their jobs. Losing a job, especially if you’re not to blame, is actually a common thing! If you find yourself in this situation, it is important to realize that you have financial assistance options.
Average tax: The average rate is equal to the total tax divided by the total taxable income. The calculation of the average rate includes the sum of all taxes paid in each bracket and its distribution by total income. The average tax rate will always be below the marginal rate.
Marginal tax: The marginal rate is the rate you pay on another dollar of income. In Canada, the federal (marginal) tax rate for individuals increases in proportion as income increases. This method of taxation that is also known as progressive taxation aims to tax people on the basis of their earnings, with the lowest incomes taxed at a lower rate than the highest incomes.
The individual taxpayer must declare their total income for the year. Canadian federal income taxes, both personal and statutory, are levied under the provisions of the Income Tax Act. Provincial and territorial income taxes are collected according to various provincial statutes. Certain deductions are allowed in determining the “net income. These include deductions for contributions to registered savings pension plans, union and occupational contributions, childcare expenses, and losses on business investments.