A comprehensive guide to calculating Income Tax in Ontario:
Looking for an Ontario Tax Calculator to to make sense of your income tax obligations? Look no further. Here’s a complete breakdown to help you make sense of your income tax obligations with this Ontario Income Tax Calculator. Let us help you with your calculations!
Most people trying to calculate their tax obligation make the mistake of applying a flat tax rate. In Canada, we are taxed according to what is known as a “marginal rate,” a much more complicated calculation. Let’s break it down!
A marginal tax rate applies to different brackets of income. For each bracket of income, a different rate applies. For example, the first $11,810 of income is taxed at a certain rate, the next $5000 or so of income is taxed at another rate, and so on and so forth, until you reach the highest tax bracket, which, in Ontario, is currently 53.53%. The more income you earn, the higher the rate of tax applied to that tax bracket.
For example, someone earning $18,000 per annum is taxed at the rate of 25 percent, while someone earning $90,000 is taxed at the rate of 37 percent. The more money you earn, the more tax you will pay, not only because 25 percent of $90,000 is more than 25 percent of $18,000, but because the more money you earn, the higher your tax bracket and, hence, the higher tax rate that will apply.
The marginal tax rates for employment and self-employment income combine federal and provincial marginal rates.
Here are the federal marginal tax rates for 2018:
- 15% on the first $46,605 of taxable income, +
- 20.5% on the next $46,603 of taxable income (on the portion of taxable income over $46,605 up to $93,208), +
- 26% on the next $51,281 of taxabale income (on the portion of taxable income over $93,208 up to $114,489), +
- 29% on the next $61,353 of taxable income (on the portion of taxable income over $144,489 up to $205,842), +
- 33% of taxable income over $205,842
While each province has their own marginal tax rates, for the purpose of illustration, let’s look at the marginal tax rates in the province of Ontario:
- 5.05% on the first $42,960 of taxable income, +
- 9.15% on the next $42,963, +
- 11.16% on the next $64,077+
- 12.16% on the next $70,000, +
- 13.16% on the amount over $220,000
In Ontario, the top marginal tax rate for combined federal and provincial employment and self-employment income is 53.53%.
It is also important to keep in mind that different types of income are subject to different marginal tax rates. There are generally six sources of income:
- Employment Income
- Self-employment income
- Capital gains
- Eligible dividends
- Ineligible dividends
- Passive income (rental income, rent, interest)
- Other income (EI, OAS, CPP)
In order to calculate the tax on your income, first we must characterize the type of income. If you are earning employment or self-employment income, the following marginal tax rates apply:
If you earned a capital gain, the following marginal tax rates apply:
If you earned dividend income, the following marginal tax rates apply:
Top Marginal Tax Rates for Different Types of Income in Ontario
As indicated, the top combined (federal and provincial) marginal tax rate in Ontario for individuals earning employment and self-employment income is 53.53%. The top marginal tax rate for capital gains is 26.76%; the top marginal tax rate for eligible dividends is 39.34%, and the top marginal tax rate for non-eligible dividends is 46.84%.
See chart below:
How to Calculate Your Income Tax
A tax calculator is often used to calculate one’s combined tax obligation. This is because marginal rates of tax are applied not only to each tax bracket, but because different types of income are taxed at different rates within the brackets, as explained above. As a result, it becomes almost impossible to calculate your combined tax obligation when you earn various sources of income manually. You need a tax calculator.
The CRA employs a tax calculator to assist you in calculating your employment taxes.
Marginal Tax Rates and Income Splitting
One way to maximize the benefits of the marginal tax rate is to income split with a spouse or family member who is in a lower income tax bracket. The lower income earner will then pay taxes at a lower marginal tax rate. The potential for tax savings by income splitting is apparent when you consider the vast spread in marginal tax rates in Ontario alone: 53.53 percent for those earning in excess of $220,000 versus 20 percent for those earning just under $43,000.
While anti-avoidance rules under the Income Tax Act have largely eradicated the practice of income splitting in Ontario, there are still exceptions where income splitting is allowed. Pension income is one such category. Upon turning 65, the higher earning spouse can split up to 50% of his or her pension income with a lower earning spouse. That way, each spouse pays taxes at a lower marginal tax rate, lowering the total tax burden overall.
Other legal ways to income split in order to take advantage of lower marginal tax rates involve lending money to a spouse at a prescribed interest rate, lending money to your child’s trust fund at a prescribed rate of interest, and lending money to a minor to invest. These strategies are discussed here in greater detail.
Both income splitting and marginal tax rates are complex topics. It is best that you consult a qualified tax lawyer to help you to reduce your tax obligation through creative tax saving strategies.
-Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law 2018
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.