Taxes on Income

Income tax is levied at both the Federal and provincial/territorial level. There are three main types of taxpayers – individuals, corporations and trusts. The following discussion will explain how individuals are taxed.

Individuals are taxed on a graduating scale. What this means is that the higher the individual’s income, the higher the rate of tax for that person. An individual’s income, for tax purposes, is calculated by determining their gross income, then subtracting certain deductions, which arrives at their taxable income. Federal and provincial taxes are levied on taxable income, which can be reduced by certain tax credits (charitable, medical, tuition, etc.) that may be available.  This is how the process works:

Stage 1: Calculate gross or total income: An individual’s Total Income for a taxation year is equal to the income from employment (salary, bonuses and commissionable income), business, property (i.e. rental income, interest and dividends), and taxable capital gains.

Stage 2: Deductions: Various deductions are then allowed to reduce total income, for example:

  • Basic personal exemption
  • RRSP contributions.
  • Certain expenses including costs of home office and car expense, provided that the costs were required under the employment contract.
  • Allowable expenses that were incurred for the purposes of earning investment income (such as interest expenses).
  • Certain child care expenditures can be deducted by the lower income spouse.
  • Investment (or business) losses from previous years can offset certain types of income.

Stage 3: Taxable Income: After deductions are taken from total income, the net amount remaining is called “taxable income”. This is the amount on which income tax is calculated.

Total income – Allowable Deductions = Taxable income 

Tax rates are then applied to your taxable income on a graduated scale (meaning that any taxable income above each specified level is taxed at higher rates). This is a marginal tax rate system.

Tax rates change year to year and province by province. The top marginal personal tax rate as of 2018 for Ontario is 53.53%. The website below allows you to see actual marginal rates for each province:

for example Ontario Rates:

Marginal taxes are applied by band on each additional dollar of income earned above the bracket threshold. For example, if someone in Ontario has a taxable income above $220,000, then the tax applied on the additional income above that amount will be taxed at that rate of 53.53%. However, any amount of income below that level will be taxed in the corresponding marginal tax bracket. In other words, in 2018 the first $11,809 of  ordinary income will be subject to no tax, ordinary income between $11,809 up to $42,960 will be subject to 20.05% tax, and so on.