Many people don’t understand how the tax system works. Canada uses a progressive tax system, meaning as your income increases, so does the average percentage of tax paid. This doesn’t mean you pay a fixed tax rate on all your income based on how much you earn. There are multiple tiers of income levels, known as brackets.
You only pay the associated tax percentage on the income that falls in each bracket. For example, for 2022 the first two tax brackets are 15% on the first $50,197 and 20.50% between $50,197 and $100,392. This means if you make $70,000, you would need to pay $11,589.17 [15%*50,197 +20.50%*(70,000-50,197)] in taxes. This is an average rate of 16.5% and not the 20.50% that some expect you would pay on the total income amount. However, if all of this is confusing to you then a reliable income tax calculator will be your best friend.
The tax brackets rise to match inflation each year, as defined by the Canadian consumer price index (CPI). This is known as indexing. The 2022 index factor is 1.024, meaning the 2021 brackets increased by 2.40%. For example, the first bracket in 2021 was $49,020 and has now increased by 2.40% to $50,197. Indexing benefits you because if you receive a wage increase to match inflation, you will not end up paying more income taxes.
Other federal income tax changes include an increase to the Canadian Pension Plan maximum contribution. In 2022, the maximum is $61,400, which is up from $58,100 in 2021. The RRSP maximum contribution increased to $29,210, which can be used to lower your taxable income.
Tax credits allow you to subtract the amount of income tax owed from your tax bill. They are the best way to reduce your annual income tax. However, it’s best to know the programs to meet eligibility criteria. Some of the most popular 2022 tax credits in Canada include:
- Child Tax Credit: This credit allows you to deduct $5,000 to $8,000 from your income, depending on your child’s age. You can claim the ladder amount for children under the age of 6 and the former for children over the age of 7. If your child has a disability, you can claim up to $11,000 of eligible expenses. The claim must be on child-care-related expenses.
- Disability Tax Credit: Canadians with various physical and mental disabilities can claim eligible therapy expenses. The credit amounts to $8,662 for 2021, with an additional $5,053 for those under 18. The 2022 credit has not been announced yet. To receive the credit, you must complete Form T2201 with your income tax submission.
On top of federal taxes, you must pay income tax to your province of residence. Although there were not many significant changes to Ontario income tax in 2022, the province unveiled some interesting tax credits.
Initially, the 2022 tax brackets increased by an indexation of 1.024. This means the 2021 tax bracket of $45,142 has now increased by 2.40% to $46,226. Aside from the indexations, Ontario introduced the Staycation Tax Credit and extended the Seniors’ Home Safety and Jobs Training Tax Credits.
Notably, the Staycation credit provides you with a 20% refund, up to $400 for accommodation expenses within Ontario. This is great if you plan on visiting a hotel, bed-and-breakfast, or resort in the 2022 tax year.
Quebec’s income tax brackets increased by 1.024 for the 2022 tax year. This increase brings the 15% tax bracket up to $46,295, from $45,105 in 2021. Other Quebec income tax changes include the increases to the provincial pension plan and employment insurance.
Quebec’s provincial pension plan, otherwise known as QPIP, has maximum pensionable earnings of $64 900 for the 2022 tax year. Additionally, the contribution rate increased to 6.15%, for a combined rate of 12.3%.
The Quebec employment insurance (EI) maximum insurable earnings increased to $60,300, up from $56,300 in 2021. The premium rate also increased back to the 2020 amount of 1.20%, after a slight decrease to 1.18% in 2021.
There are no significant changes to Quebec tax credits for 2022.
BC did not have significant changes to income taxes for the 2022 tax season. However, the province introduced an additional property transfer tax bracket in 2021. There is now a 5% fee on the purchase price of properties valued at over $2,000,000.
In the 2021 budget, the province also announced an extension to the Climate Action Tax Credit. This credit enables you to claim up to $193.50 and $56.50 per child. It is meant to offset carbon tax for low-income families.
Alberta stopped indexing tax brackets after 2019. This means the 2021 and 2022 tax brackets are the same. Alberta is known for favourable tax rates for high-income earners. For example, the province only charges 10% on the first $131,220 of income earned. The rate increases to 12% for income between $131,220 and $157,464.
In 2020, the province introduced the Alberta Child Benefit (ACB), which provides parents of one child a maximum base credit of $1,330. This increases to $3,325 for parents with four or more children.
The latest changes to Canada’s income tax in 2022 include an index factor of 1.024, meaning the 2021 brackets increased by 2.40%. Most provinces index their tax brackets each year, however Alberta does not do this. Other income tax changes include an increase to the Canadian Pension Plan maximum contribution and Ontario Income Tax Changes such as the Staycation Tax Credit.