Tax Brackets in Canada

by Adam Goodwin | 2015 | Last Updated: May 8, 2015

Tax Brackets in Canada

If you see a mistake/error, please let me know ASAP! This is meant to be an example, and is not tax advice, or legal advice. Please contact a certified accountant or a professional lawyer for legal and accurate advice.

Recently Justin Trudeau, leader of the Liberal Party of Canada, suggested that he will raise taxes for Canada’s largest earners (National Post coverage). It reminded me of the mis-understandings around tax brackets.

To best illustrate this, I will use an example. I ignore tax credits, etc.

Tax Rates

For simplicity, let’s say, tax brackets are the following:

Income between \$0-9999 = 0%

Income between \$10000-19999 = 5%

Income between \$20000-29999 = 10%

income between \$30000-39999 = 15%

Common Perception

The common perception amongst many I speak to is that if I make \$30500 per year, then I would have to pay 15% taxes on this total amount. This is equivalent to \$4575 per year in taxes (15% of \$30,500) so would take home \$25925.

Now, let’s continue to use the common perception and calculate the taxes for someone making \$29500 per year. At 10% tax rate, they would pay \$2950 in taxes and thus would take home \$26550.

How is this so? You take more home making \$29500/year than \$30500/year?

This is why many suggest that a raise can actually end up costing you more, and thus you would take home less (again, this calculation ignores tax credits, etc).

This perception, for the most part, is wrong. Yes, wrong!

In the \$30500/year example, you would only pay the 15% on any amount over \$29999.99.

Example Calculation

So, what happens with the individual making \$30500/year? This is how the taxes would calculated (using the rates from above).

• < \$10000 = 0% = \$0 of taxes
• \$10000 = 5% = \$500 of taxes
• \$10000 = 10% = \$1000 of taxes
• \$500 = 15% = \$75 of taxes

So the individual making \$30500 per year would actually only pay \$1575 in taxes – a huge difference from the \$4575 that was calculated in the common mis-conception section of this blog post. This individual would bring home \$28925.

Here is the calculation for the individual making \$29500/year.

• < \$10000 = 0% tax rate = \$0 of taxes owing
• \$10000 = 5% = \$500
• \$9500 = 10% = 950

So this individual making \$29500/year would actually owe \$1450 so would bring home \$28050.

That Raise

What about that raise?

In many cases, take the raise! The person making \$30500/year brought home \$28925 after taxes while the person with a salary of \$29500 would bring home only \$28050. This is a much different result from the calculation under the misconception section of this blog post!

Before you make any major financial decisions, I strongly recommend, and urge you, to speak with a financial advisor and/or lawyer for professional, certified, and sound advice. This blog post is purely to raise a challenge to the mis-conception about how tax brackets in many countries actually operate.

Your Call to Action

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