Chapter 4: Taxable Income and Tax Payable for Individuals

Calculation of Tax Payable

Federal Tax Payable Before Credits
4.10 – The calculation of federal Tax Payable for individuals requires the application of a group
of progressive rates to marginal increments in Taxable Income. The rates are progressive starting
at a low of 15% and increasing to a high of 33% as individual’s Taxable Income increases.

4.11 – For 2020, the brackets to which these five rates apply are as follows:

4.12 – The average rate for an individual is equal to the Federal Tax divided by Taxable Income
in Excess of. EX: Average rate for the 20.5% is (7280 / 48535 = 0.15 =15%) and the Average
rate for the 20.5% is (49645 / 214368 = 0.232 = 23.2%)

4.13 – There is a common misconception that once Taxable Income reaches the next tax bracket,
all income is taxed at a higher rate.

4.14 – The table above suggests that individuals are taxed on their first dollar of income. While
the 15 % rate is applied to all the first 48535 of Taxable Income a portion of this amount is not
really subject to taxes. Every individual resident in Canada is entitled to a personal tax credit. For
2020, this tax credit is at least (12298 * 15% = 1845).

4.15 – As an example of the calculation of federal Tax Payable before credits and the resulting
average rate of taxation, consider an individual with Taxable Income of 108300. The calculation
would be as follows:
4.16 – A surtax is an additional tax calculated based on the regular Tax Payable calculation.
While such additional taxes are not assessed at the federal level, they are currently used in
Ontario and PEI.

Provincial Tax Payable Before Credits

Provincial Rates
4.17 – Provincial Tax Payable is calculated by multiplying Taxable Income by a group of
progressive rates. Provinces other than Quebec use the same Taxable Income figure that is used
at the federal level.

4.18 – All provinces use anywhere from 3 to 6 different tax rates applied to various levels of
income. In general, the applicable income levels differ from those used in the federal brackets.

4.19 – To give you some idea of the range of provincial rates, the 2019 minimum and maximum
rates for provinces other than Quebec are found in the following table. The maximum rates
include surtaxes where applicable. These rates are correct as of Jan 1, 2020. You may see other
rates after this point in time as provincial budgets are introduced.

4.20 – Note the significant differences in rates between the provinces. The maximum rate ranges
from 14.5 % in Saskatchewan to 21% in Nova Scotia. This difference amounts to extra
provincial taxes of 6500 per year on each additional 100000 of income. This can make provincial
tax differences when an individual tried to establish themselves in a province.
4.21 – When these provincial rates are combined with the federal rate schedule, the minimum
combined rates varies from a low 20.05% in Ontario (15% federal plus 5.05% provincial), to a
high of 25.8% in Manitoba (15% federal plus 10.8% provincial).

4.22 – Maximum combined rates are lowest in Saskatchewan where the rate is 47.5% (33%
federal plus 14.5% provincial). They are highest in Nova scotia where the combined rate is 54%
(33% federal plus 21% provincial). Since the calculations of Quebec are completely different, we
have not included Quebec in this list of rates. We would note however, the overall rate in Quebec
ranges from a low of 27.53% to a high of 53.31%.

Provincial Residence
4.23 – Given the significant differences in provincial tax rates on individuals, it is somewhat
surprising that the rules related to where an individual will pay provincial taxes are fairly simple.
With respect to an individual’s income other than business income, it is subject to tax in the
province in which he or she resides on the last day of the taxation year. This means that if an
individual moves to Ontario from Nova Scotia on December 30 of the current year, any income
for the entire year, other than business income will be taxed in Ontario.