Canadian federal income tax has five brackets in 2016 and is calculating separately from provincial and territorial income tax as each province has multiple tax brackets.
To calculate income tax, taxable income must be calculated first. Taxable income is the same for federal and provincial except for Quebec where the taxable income amount may vary from the federal amount. After income is calculated, federal and provincial income tax are calculated separately based on total taxable income. Schedule 1 of the federal tax return and Form 428 of the provincial and territorial tax return show detailed calculations. Both tax schedules may be found on the Canada Revenue Agency (CRA) website by searching for tax return forms. Residents of Quebec will need to view the income tax return and work chart 401 on the Quebec website.
The amount of tax increases as taxable income increases. Taxpayers will pay the lowest tax rate for their taxable income level within their tax bracket. Income that is in excess of the taxable income level will be taxed at the next higher tax rate.
The next step is to calculate non-refundable tax credits. Non-refundable tax credits are calculated separately for federal and provincial taxes. Non-refundable tax credits include personal exceptions, which are available to all tax payers. The federal and provincial/territorial Income Tax Acts define the order in which tax credits are calculated. The personal tax credit page includes a list of the most common non-refundable tax credits. The amount of the tax credit is calculated by multiplying the non-refundable tax credit amount by the rate for the lowest tax bracket which is 16% and 20% in Quebec. Tax credit for donations has a two part calculation and dividend tax credits are calculated separately. The non-refundable tax credit amount is subtracted from the income tax calculation.
The amount of provincial surtax is calculated based on net taxes payable after refundable tax credits have been subtracted for PEI. The surtax for Ontario is calculated based on net taxes payable after refundable tax credits except dividend tax credits have been subtracted,
Once the amount for federal and provincial/territorial income taxes are calculated including the total of non-refundable tax credits and surtax, the refundable tax credits are deducted. If the amount of the income tax is negative the income tax amount if zero. The refundable tax credit is subtracted from the income tax amount. If the refundable tax credit is greater than the income tax amount the difference is refunded to the taxpayer. The Canadian Income Tax and RRSP Savings Calculator explains how the surtax (PEI and ON only) are calculated in relation to non-refundable tax credits.
The personal amount is the amount of income that can be earned before any tax is paid to the province or territory. The personal amount and the tax rate used to calculate the tax credit is listed in the tax rate table for the province and territory. A low income tax reduction is available in some provinces. The low income tax reduction increases the amount that can be earned before any tax is due.
For additional information on income tax rates, feel free to contact Chista Group at (647) 848-1855