Welcome to tax season! As the old saying goes, nothing is certain in life but death and taxes.
We all pay taxes in one way or another, and while taxes fund essential services and infrastructure, you don’t want to pay more than necessary. Let’s review the basics of the Canadian tax system so you can make informed financial decisions and keep more of your hard-earned money.
Canada has a progressive tax system, meaning tax rates increase as your income rises. However, moving into a higher tax bracket doesn’t mean you take home less money overall—it just means that only the portion of your income above the bracket threshold is taxed at a higher rate.
Suppose you receive a promotion that increases your salary from $55,000 to $75,000. How does this impact your after-tax income?
Let’s look at a simplified scenario:
| 2025 Tax Bracket | Marginal Tax Rate | Taxes Payable | |
| $55,000 Income | $75,000 Income | ||
| First $57,375 | 22.20% | $12,737.25 | $12,737.25 |
| over $57,375 and up to $114,750 | 30.34% | $0 | $5,347.43 |
| Total Tax Paid | $12,737.25 | $18,084.68 |
| Average Tax Rate | 22.20% | 24.11% |
| After-Tax Income | $42,262.75 | $56,915.32 |
Even though part of your income falls into a higher tax bracket, your take-home pay still increases as you earn more.
For most employees, income tax is automatically deducted from your pay by your employer. When you prepare your tax return, you determine whether enough tax was deducted:
While many people love their tax refunds, they’re actually an interest-free loan to the government. That money could have been in a savings account earning interest, or in an investment account growing for retirement. If you regularly receive large refunds, consider submitting a new TD1 form to your employer or filing a T1213 form with the CRA to reduce tax withholding and save the money instead.
Tax Deductions: Reduce Your Taxable Income
Tax deductions lower the income on which you pay tax, making them more valuable for higher-income earners. Some common deductions include:
For example, if you earn $95,000 and claim a $1,000 deduction, you save $300 in taxes (assuming a 30% marginal tax rate).
Tax Credits: Reduce Your Tax Owed
Tax credits reduce your tax bill directly. Some credits are non-refundable, meaning they only help if you owe taxes, while refundable credits can provide a refund even if you have no tax owing.
Common Non-Refundable Credits:
Common Refundable Credits:
For example, if you qualify for a $100 refundable credit, you get $100 back whether you owe tax or not. But if it’s non-refundable, you only benefit if you have taxes payable.
In Canada’s progressive tax system, earning more money generally leads to a higher take-home income, even if a portion is taxed at a higher rate. The key to tax efficiency is knowing which deductions and credits you qualify for and using them strategically. At the end of the day, pay what you owe, but not more than you need to!
