Personal & Corporate Tax

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.

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.