Overview of the Canadian Tax System
The Canadian tax system is an honour-based system that requires you to declare your Worldwide income to the Canada Revenue Agency (CRA), whether an information slip was issued to you or not. The Canadian personal income tax system is based on graduated tax rates at both federal and provincial levels. This means that increasing tax rates apply to increasing levels of taxable income. The tax rates stay steady over a range of incomes and then increase and remain static over another range. These ranges are commonly referred to as tax brackets.
Source: Federal tax legislation, 2016
There are two different tax rates you may hear referenced: marginal and average. Your average tax rate (also referred to as your “effective” tax rate) is calculated as the total tax payable divided by your taxable income. Your marginal tax rate is generally the percentage of tax payable on the next dollar of your taxable income. There is a difference between the two rates because, as mentioned above, Canada has a system of progressive tax rates. Your average tax rate is always equal to or less than your marginal tax rate.
Revenue of various types are taxed at different rates. The following chart shows how interest, dividends and capital gains compare on an after-tax basis when you invest $1,000 in Ontario. The chart assumes you pay tax at the highest marginal tax rate in effect in 2016.
If you received $1000 of taxable income from each of these sources, this is what you would keep:
The Canadian tax system is complex. Different types of income are taxed in different ways and a number of government-assisted programs exist to help taxpayers save. Speak with a qualified tax advisor about the programs and strategies that might work for you.
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This publication is not intended as nor does it constitute tax or legal advice. Consult your lawyer, accountant or other professional advisor when planning to implement a strategy. This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure your own circumstances have been considered properly and action is taken on the latest available information. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trademarks of Royal Bank of Canada. Used under licence. ©2018 RBC Dominion Securities Inc. All rights reserved.