Tax planning

Understanding progressive tax rates

Published by
Alexandre Blouin
Alexandre Blouin

Myth or reality? If a taxpayer earns $90,000 per year and is offered a raise of $10,000 annually by his employer, the taxpayer will be a "loser" since he will change his tax bracket (see tax bracket here -

The truth about progressive tax rates in Quebec and Canada

If you answered that this is the reality, rest assured: we are not the only ones! But it is indeed a myth. The reality is that the taxpayer will have to pay 37.118% tax (federal and provincial combined) on the first $2,580 and a rate of 41.118% on the remaining $7,420. It is false to claim that the new annual income of $100,000 will be taxable at 41.118% in full.

As proof, if you earned $55,000 in 2022 and you earn an additional $100 for the same year, depending on the tax brackets, you will have to pay $37.12 in taxes on the $100. You will therefore be left with $62.88 after tax. If you earned $115,000 in 2022 and you earn the same additional $100, you will have to pay $47.46 in taxes. You will therefore be left with $52.54 after tax. For the two previous examples ($55,100 and $115,100), it is true to say that both taxpayers will have paid the same amount of tax for the first $55,100 of income.

The idea for this blog comes from the fact that many people believe that tax is calculated with a fixed rate based on taxable income at the end of a calendar year. This myth is very widespread in Quebec. This fixed rate principle only applies to joint-stock companies.

How does the progressive tax system of Canada and Quebec work?

In Canada, taxes are structured progressively, so people with higher incomes are subject to higher tax rates than those with lower incomes; the more money you earn, the more taxes you owe. At the federal level, there are five tax brackets ranging from 12.525% to 27.555%. At the provincial level, there are four tax brackets ranging from 15% to 25.75% for the year 2022.

In Canada, all citizens must pay income taxes to both the federal government and their province/territory. With the exception of Quebec, the federal government collects taxes on behalf of these provinces/territories and redistributes them accordingly. Quebec, on the other hand, is responsible for its own tax system.

For individuals in Quebec, taxation works in tiers. That is, each dollar earned in a year may be taxed at a different rate, depending on previously accrued income. This is called a “tiered marginal tax rate”.

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Why a progressive federal and provincial tax?

Progressive taxation, or tiered marginal tax rates, at the federal and provincial level is seen as a method of reducing economic inequality by taxing wealthier people at higher rates than lower income people. The aim is to redistribute money from richer people to lower income people and help them improve their financial situation.

In addition, the progressive tax system allows governments to raise sufficient funds to finance public services, such as health care, education and social programs, which are considered to be of importance to society in his outfit.

Finally, the progressive tax system can also encourage low-income people to consume more, stimulating demand for products and services, which can contribute to economic growth.

Is the progressive tax rate a good thing?

The effectiveness and relevance of the progressive tax system depends on the political and economic views of different groups. This method of taxation can be controversial and debated, as some consider that it can be unfair to the wealthiest people and can discourage economic growth by reducing the incentives for high-income people to invest and create wealth.

However, some arguments in favor of the progressive tax system include:

  • Reducing inequality: By taxing wealthier people at higher rates, the progressive tax system can help reduce wealth gaps.

  • Funding for public services: The progressive tax system can help raise enough funds to fund public programs and services, such as health care, education, and social programs.

  • The incentive for economic growth: By taxing low-income people less, the progressive tax system can encourage them to consume more and stimulate demand for products and services, which can contribute to economic growth.

However, others may argue that the progressive tax system may be unfair and encourage state dependency, as wealthier people may be forced to pay a higher portion of their income to fund government programs. , without receiving a direct benefit in return.

Ultimately, whether the progressive tax system is a good thing depends on many factors, such as economic goals, fiscal policies, and personal views on tax justice.

What is the difference between marginal tax rate and effective tax rate?

  • Marginal tax rate: This is the rate that applies to an individual's last income bracket.
  • Effective rate: This is the tax rate taking into account all tax credits and the taxable income of an individual.

The marginal tax rate refers to the tax rate on the last dollar of earned income. This is the tax rate applied to each income bracket in a progressive tax system.

The effective rate, on the other hand, refers to the average tax rate on total income. It takes into account all the taxes a person pays, including federal taxes, provincial taxes, and payroll taxes, and is calculated by dividing total taxes paid by total income.

In general, the effective rate is lower than the marginal rate for people with higher incomes, because the higher marginal rates apply only to part of their income. The effective rate reflects an average overall cost of taxing, while the marginal rate reflects the additional cost of taxing for each dollar of additional income earned.

Let's take an example to clarify the difference between the two rates.

An individual earns employment income of $150,000 annually. In 2022, for every dollar earned above $112,655, up to a maximum of $150,000, the tax rate will be 47.46%. However, the effective rate for the individual will be around 34% since it takes into account the basic tax credits as well as the different tax levels. Thus, the individual has an effective rate of 34% and a marginal tax rate of 47.46%.

It is therefore an element to take into account when filing your income tax, whether you are an individual or a company.

Useful information and definitions to understand the progressivity of tax rates

Are there ways to get into a lower tax bracket?

  • Tax credits are quantities that reduce the taxes apprehended on an individual's taxable income. Some of these credits are recoverable, others are not. A good example of a recoverable or refundable tax credit is the Canada education credit. An example of a sunk tax credit is the charitable donation tax credit.
  • All Canadians have access to the federal non-refundable Basic Personal Amount (BPA) tax credit, which is set at $14,398 for the 2022 tax year. Remember to also check your MRB rate. province.

When are federal and provincial tax amounts indexed?

Federal and provincial tax amounts are generally indexed each year to inflation to account for rising living costs.

When do individuals have to declare their income?

The personal income tax return is usually due by April 30 each year for the previous year's income.

What are the different types of taxable income for individuals?

Types of taxable income for individuals include active income, pension income, investment income, etc.

How is the personal tax rate calculated?

The tax rate for individuals is calculated based on their taxable income and applicable federal and provincial tax rates.

What are personal tax credits?

Personal tax credits are amounts that can be deducted from the amount of tax owed. They can include credits for education costs, medical costs for example.

How can tax credits affect the progressivity of tax rates?

Tax credits can affect the progressivity of tax rates by reducing the tax burden for people with lower incomes. For example, the basic personal credit of $2,421 can reduce a person's own tax with lower incomes.

How does corporate tax rate progression apply?

The progressive tax rates also apply to businesses, including small businesses and limited liability companies. Corporate tax rates may vary depending on the applicable tax regime and tax scales.

Are there regular updates on the progressivity of tax rates?

Yes, the indexed amounts can be updated each year to take inflation into account. Tax schedules can also be changed by the government at any time.

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