Canada uses a graduated (progressive) income tax system. You pay a lower rate on your first dollars of income and higher rates only on income above each threshold — not on all your income at once. In addition to federal tax, each province charges its own income tax on top. Your total tax bill combines both layers, but the average effective rate most Canadians actually pay is much lower than their marginal (top bracket) rate.
Canada's Progressive Tax System: The Key Concept
The single most important thing to understand about Canadian income tax is this: moving into a higher bracket only affects the portion of your income above that threshold. It does not cause all your income to be taxed at the higher rate.
Example: If you earn $60,000 in Ontario in 2025, you do not pay 26.5% (the combined bracket for $57,375–$100,392) on all $60,000. You pay 15% on the first $57,375 federally, and 26.5% only on the last $2,625 that sits above the threshold.
This is one of the most common misconceptions newcomers (and many long-time Canadians) have about the tax system.
Federal Income Tax Brackets (2025)
Canada's federal government taxes income at graduated rates. The 2025 federal brackets are:
Before these rates apply, the Basic Personal Amount (BPA) of $16,129 (federal, 2025) is deducted from your income. This means the first $16,129 of income is not taxed at all federally.
Provincial Income Tax: A Second Layer
Each province and territory charges its own income tax on top of the federal tax. Provincial rates and brackets vary significantly.
2025 Combined Marginal Rates at $80,000 Income (Federal + Provincial)
Quebec administers its own separate income tax system through Revenu Québec, not the CRA, which is why Quebec residents file two tax returns each year (one federal, one provincial).
Marginal Rate vs. Effective Rate: What You Actually Pay
Marginal rate: The rate that applies to your next dollar of income (top bracket you are in).
Effective rate: Your total tax as a percentage of your total income.
For most Canadians, the effective rate is significantly lower than the marginal rate because lower brackets apply to the first portions of income.
Example: $75,000 income in Ontario (2025 estimate)
What Is "Taxable Income"?
Your taxable income is not the same as your gross income. Several deductions reduce what is actually taxed:
- RRSP contributions — Each dollar contributed reduces taxable income by one dollar
- Union dues and professional membership fees
- Childcare expenses (claimed by the lower-income parent)
- Moving expenses (if moving for work or school, 40 km closer rule)
- Support payments (deductible by the payer in some circumstances)
- Business expenses (if self-employed)
The result after these deductions is your net income (Line 23600 on your T1 return), and after further adjustments, your taxable income (Line 26000).
How Tax Is Collected: The Withholding System
In Canada, your employer deducts estimated income tax from each paycheque and remits it directly to the CRA. This is called withholding at source.
The amount withheld is based on your TD1 form — a form you fill out when you start a new job that tells your employer about your expected income and basic credits (such as the Basic Personal Amount).
When you file your annual tax return, the CRA reconciles:
- Tax withheld from your paycheque(s)
- Tax actually owed based on your full income picture
If more was withheld than you owe → refund. If less was withheld than you owe → balance owing.
The TD1 Form: Setting Up Withholding Correctly
The TD1 Personal Tax Credits Return is a form you complete for your employer when you start a job. It tells your employer how much tax to deduct from each paycheque.
As a newcomer, complete:
- TD1 (federal form)
- TD1 [Province] (provincial form — e.g., TD1ON for Ontario)
The default TD1 applies the Basic Personal Amount only. If you have additional credits (e.g., eligible tuition, disability amounts), claim them on the form to reduce withholding and improve your monthly cash flow.
CPP, EI, and Other Payroll Deductions
Before income tax, three other deductions appear on every paycheque. These are not income tax but are often confused with it:
- CPP (Canada Pension Plan): A retirement contribution. Employee rate: 5.95% on earnings between $3,500 and $73,200 (2025). See our full guide: [CPP and EI Deductions Explained](/articles/cpp-ei-deductions-explained-newcomers).
- EI (Employment Insurance): An insurance premium. Employee rate: 1.64% on insurable earnings up to $65,700 (2025).
- Income tax: The graduated federal + provincial tax described in this article.
Non-Residents and Newcomers: Part-Year Returns
If you arrived in Canada partway through the year, you file as a part-year resident. Key rules:
- You report only Canadian income from the date you became a resident
- Your Basic Personal Amount and most credits are prorated based on the number of days you were a resident
- You may also need to report world income for the period before arrival if Canada has a tax treaty with your home country
The CRA's guide T4055 — Newcomers to Canada explains part-year filing in detail. Tax software handles the proration automatically when you enter your arrival date.
Example Scenarios
Frequently Asked Questions
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