How the brackets stack
Federal income tax applies in five brackets, with rates that climb as your taxable income climbs. Alberta’s provincial tax applies in its own set of brackets on top of that. Your marginal rate (the rate on the next dollar earned) is the sum of the federal rate and the Alberta rate at your income level.
Your average rate (total tax divided by total income) is always lower than your marginal rate, because earlier dollars were taxed in lower brackets.
Where to find the current numbers
Bracket thresholds and rates are revised every year. We deliberately do not publish a static table here that goes stale. The authoritative sources are:
What this means for tax planning
A few things follow from how the brackets work:
- RRSP contributions reduce tax at your marginal rate. A $5,000 contribution at a 36% marginal rate saves $1,800. Same contribution at a 25% marginal rate saves $1,250.
- Income splitting between spouses can save material tax when the higher-earning spouse is in a higher marginal bracket. Pension income splitting and spousal RRSPs are the main tools.
- Capital gains are taxed at half the rate of ordinary income (the inclusion rate is 50% for most taxpayers, with rules around higher amounts that have changed in recent years). Where to realize a gain is itself a planning question.
- Eligible Canadian dividends from public corporations and CCPCs paying tax at the general rate are taxed differently from interest, with a federal and provincial dividend tax credit. The effective rate on eligible dividends in lower income bands is often substantially below the rate on interest.
Corporate rates (Alberta)
For Canadian-controlled private corporations earning active business income, two combined federal and provincial rates apply:
- Small business rate. On the first $500,000 of active business income (the small business deduction limit), the combined federal and Alberta rate is in the low double digits.
- General rate. Above the small business limit, income is taxed at the higher general corporate rate.
Investment income inside a CCPC is taxed at a different (higher) rate, with refundable mechanisms that interact with how dividends are paid out. We model these for clients on a return-by-return basis.
Want a number for your situation?
Marginal-rate planning is one of the most useful conversations to have before year-end. If you are deciding how much to contribute to an RRSP, when to sell an investment, or whether to take salary versus dividend, give us a call. We can run the numbers.