Personal Finance

Income Tax Personal Amount and Marginal Tax Rates

  • Last Updated:
  • May 8th, 2021 9:07 pm
[OP]
Newbie
Jun 15, 2018
32 posts
13 upvotes

Income Tax Personal Amount and Marginal Tax Rates

I'm trying to understand the marginal tax rates in Canada, but I am not understanding the "personal amount".
If I look at this web page (and many others), they show a nice table with the marginal tax rates.
In the research that I have done, it appears that the personal amount means that the first $13808 is not taxed.
However if that is true, then why wouldn't the first two lines in the table simply say:

0-13808 tax rate=0%
13808-49020 tax rate=15%

Instead of simply putting that first line in the table, they break it out into this convoluted "personal amount". Since they do this, I must assume my understanding of "personal amount" is wrong.

So that begs the question... then what is this "personal amount" if it is NOT a zero tax rate for the first $13808?
16 replies
Deal Fanatic
Jan 19, 2017
5610 posts
3133 upvotes
btwpg999 wrote: I'm trying to understand the marginal tax rates in Canada, but I am not understanding the "personal amount".
If I look at this web page (and many others), they show a nice table with the marginal tax rates.
In the research that I have done, it appears that the personal amount means that the first $13808 is not taxed.
However if that is true, then why wouldn't the first two lines in the table simply say:

0-13808 tax rate=0%
13808-49020 tax rate=15%

Instead of simply putting that first line in the table, they break it out into this convoluted "personal amount". Since they do this, I must assume my understanding of "personal amount" is wrong.

So that begs the question... then what is this "personal amount" if it is NOT a zero tax rate for the first $13808?
This personal amount is called the personal exemption credit. It is used to reduce your tax payable. It is not used to reduce your total taxable income. You calculate the total tax payable based on your total taxable income first. Then reduce your total tax payable by the total tax credits. If your total taxable income is $13808, then your tax payable before applying the tax credit = $13808 x 15%. Then you reduce the tax payable by the tax credit of $13808 x 15%. So your net tax payable is zero after applying the tax credit. So it is the same as zero tax rate because zero divided by $13808 = zero.
Last edited by ml88888888 on May 8th, 2021 2:13 pm, edited 1 time in total.
Deal Addict
Mar 3, 2018
2237 posts
2278 upvotes
GTA
Once upon a time a long time ago the personal exemption amount was a deduction from income. For years now it has been a tax credit. So 15% Fed rate of 13,808 reduces your Fed tax payable.

Also the marginal tax rate is the tax rate paid on your next dollar of income. Basically your highest tax rate as you keep adding income.
Deal Addict
Jul 15, 2009
2341 posts
1512 upvotes
btwpg999 wrote: 0-13808 tax rate=0%
13808-49020 tax rate=15%
In most cases, in most situations, this is how it works out, so it's fine to think of it this way.

Technically, it's calculated differently, so could make a difference in some strange situations. The calculation is to multiply taxable income (up to $49,020) by 15% to get tax payable, then subtract 15% of the basic personal amount from the tax payable. This could make a difference for some other credits based on taxable income or on tax payable before the basic personal amount is subtracted.

The Ontario surtax is similar in that it works almost like two additional tax brackets, although it's more complicated than the basic personal amount.

Oh, and starting in 2020, the basic personal amount is reduced for people with income over $150k.
[OP]
Newbie
Jun 15, 2018
32 posts
13 upvotes
ml88888888 wrote: This personal amount is called the personal exemption credit. It is used to reduce your tax payable. It is not used to reduce your total taxable income. If your total taxable income is $13808, then your tax payable is zero. So it is the same as zero tax rate because zero divided by $13808 = zero.
Thanks. I don't doubt you are right, by I do admit I don't understand how the two things are different (having an income bracket between 0 and 13808 with zero tax, or reducing tax payable).
Perhaps it is easier to understand if I ask this:
if 0-13808 is NOT an income bracket with zero tax, under what circumstances would a person actually pay any tax if their income was between 0 and 13808?
It's another way of asking why is it not simply listed in the table?
Sr. Member
May 24, 2018
524 posts
330 upvotes
Ontario
But starting in tax year 2020, it is no longer universally $13229 ($13808 in tax year 2021) for everyone. The amount depends on the person's income level. In essence, a smaller tax credit will be given to those in a higher tax bracket.

Read my entry #6074 ( Apr 30th, 2021 5:52 pm ) in this other RFD thread
tax-time-im-public-accountant-so-ask-me ... #p34419469

Hope this helps
Deal Fanatic
Jan 19, 2017
5610 posts
3133 upvotes
hwyc2007 wrote: But starting in tax year 2020, it is no longer universally $13229 ($13808 in tax year 2021) for everyone. The amount depends on the person's income level.

Read my entry #6074 ( Apr 30th, 2021 5:52 pm ) in this other RFD thread
tax-time-im-public-accountant-so-ask-me ... #p34419469

Hope this helps
You are making it even more complicated by talking about higher income. He is just interested in income of $13808 because he doesn’t even understand the basic tax rule for using the personal exemption credit. The tax value of the personal exemption credit is worth the same to everyone, no matter what your income level is, which is = $13808 x 15%. Remember all tax credits are always worth 15% value. On the other hand tax deductions are calculated on a person’s marginal tax rate. So for a high income person, tax deductions are worth more than tax credits.
Sr. Member
May 24, 2018
524 posts
330 upvotes
Ontario
I am saying making a 0% tax income bracket (in addition to the existing 5) won't work anymore.

( ... still not sure where my thinking got confused or making it overly complicated ... do carry on pls )
Last edited by hwyc2007 on May 8th, 2021 5:56 pm, edited 2 times in total.
Deal Fanatic
Jan 19, 2017
5610 posts
3133 upvotes
btwpg999 wrote: Thanks. I don't doubt you are right, by I do admit I don't understand how the two things are different (having an income bracket between 0 and 13808 with zero tax, or reducing tax payable).
Perhaps it is easier to understand if I ask this:
if 0-13808 is NOT an income bracket with zero tax, under what circumstances would a person actually pay any tax if their income was between 0 and 13808?
It's another way of asking why is it not simply listed in the table?
I already said in the statement you have quoted, the tax is zero if your taxable income is $13808.
Deal Fanatic
Jan 19, 2017
5610 posts
3133 upvotes
hwyc2007 wrote: I am saying making a 0% tax income bracket won't work anymore.
May be you are as confused as btwpg999. there is no such thing as 0% tax bracket. You can consider 0 - $13808 as 0% tax bracket because the end result is 0 tax payable if your taxable income is <= $13808 due to your tax payable is reduced by the $13808 tax credit.
Deal Fanatic
Jan 19, 2017
5610 posts
3133 upvotes
May be the following example will clear up all confusions. The actual tax brackets are 15% between 0 to $49020 and 20.5% between $49020 and $98040. If your total taxable income is $62828, your total tax payable before any credit is applied will be calculated this way: $49020 x 15% + $13808 x 20.5%. Then you would reduce the total tax payable by the $13808 tax credit which would be calculated = $13808 x15%. If using your way of thinking about 0% tax bracket on income <= $13808 and 15% on $13808 - $49020, then your tax payable would be = $49020 x 15%. They are different, if you ignore other extra credits and/or deductions.
For total taxable income <= $49020, there is no difference. But income above $49020, it will be different.
[OP]
Newbie
Jun 15, 2018
32 posts
13 upvotes
ml88888888 wrote: If using your way of thinking about 0% tax bracket on income <= $13808 and 15% on $13808 - $49020, then your tax payable would be = $49020 x 15%. They are different
My apologies as I'm likely not explaining "my" method very well.
For an income of $62828 (as in your example), my method would have 3 tax brackets instead of 2 tax brackets and some credit later.

So:
0-13808 = 0% = 0% x 13808 plus:
13808-49020 = 15% x (49020-13808) plus:
49020-62828 = 20.5% x (62828-49020)

Don't get me wrong... I'm not trying to say one method is netter than the other etc, rather I'm trying to understand the reason for this exception so I can plan properly.

There may be nothing to this at all and it could be that there is simply "no reason" for this exception and it works exactly like an extra tax bracket with zero tax.
I'm reading the answers above, and if I've got it correct, it looks like the consensus is that there is no difference between this personal amount and a simple extra tax bracket.
If that is so, then that is good for me (and others) to know so we can plan properly.

I do think it was reasonable to ask the question, because it does seem bizarre to take a simple tax bracket from an easy to understand table and separate it into something called "personal amount" that no human being could ever decipher the meaning from just the words. CRA seemed to go to an lot of effort for no reason (but it is government though) ;-)

It would be like if you went to a CRA building and saw some bare electrical wires running to the door handle on the building. I suppose there could be no reason that someone went to the effort of running those wires and they could say that "it's just a door that works like any other door", but it sure would prompt you to question it before touching the handle. ;-)
Deal Fanatic
Jan 19, 2017
5610 posts
3133 upvotes
btwpg999 wrote: My apologies as I'm likely not explaining "my" method very well.
For an income of $62828 (as in your example), my method would have 3 tax brackets instead of 2 tax brackets and some credit later.

So:
0-13808 = 0% = 0% x 13808 plus:
13808-49020 = 15% x (49020-13808) plus:
49020-62828 = 20.5% x (62828-49020)

Don't get me wrong... I'm not trying to say one method is netter than the other etc, rather I'm trying to understand the reason for this exception so I can plan properly.

There may be nothing to this at all and it could be that there is simply "no reason" for this exception and it works exactly like an extra tax bracket with zero tax.
I'm reading the answers above, and if I've got it correct, it looks like the consensus is that there is no difference between this personal amount and a simple extra tax bracket.
If that is so, then that is good for me (and others) to know so we can plan properly.

I do think it was reasonable to ask the question, because it does seem bizarre to take a simple tax bracket from an easy to understand table and separate it into something called "personal amount" that no human being could ever decipher the meaning from just the words. CRA seemed to go to an lot of effort for no reason (but it is government though) ;-)

It would be like if you went to a CRA building and saw some bare electrical wires running to the door handle on the building. I suppose there could be no reason that someone went to the effort of running those wires and they could say that "it's just a door that works like any other door", but it sure would prompt you to question it before touching the handle. ;-)
You can interpret anyway you see it as long as the end result is the same. In your case, it is the same end result. I am just interpreting the exact way how the calculation steps are done when you file your tax. It is like you can pay with 100 pennies when the cost is $1(may be this case won't be the same because I heard some stores don't even accept pennies any more).
Deal Addict
Mar 3, 2018
2237 posts
2278 upvotes
GTA
It has been explained numerous times and I think this is all too much for the OP.

When the personal amount is a tax credit there can be no 0% tax bracket. The end result looks the same when it says you owe no tax on income under 13,808. But what is happening is there is a Federal tax assessed at 15%. You just have a tax credit to offset it to bring it to zero.
Deal Addict
Jul 15, 2009
2341 posts
1512 upvotes
hwyc2007 wrote: I am saying making a 0% tax income bracket (in addition to the existing 5) won't work anymore.

( ... still not sure where my thinking got confused or making it overly complicated ... do carry on pls )
If you made a 0% tax bracket ending at $13,808 (for 2021) and raised the 29% tax bracket to 29.32%, you'd get the exact same effect. So in fact you could still achieve the same effect as the clawback of the basic personal amount even with a 0% bracket with a fixed threshold. I would guess they didn't do it this way for political reasons: they didn't want to admit to raising the marginal tax rate from 29 to 29.32.

Lots of the complexity in the tax calculation is for political reasons, politicians wanting to raise taxes without admitting that they are raising taxes, so they come up with crazy math tricks.

One more answer for the OP: most people will have additional credits on top of the personal amount for various things, so most people that make slightly over that amount will still pay 0% tax. It would be confusing if those people were paying 0% tax but were in the 15% tax bracket while other people making slightly under the amount were paying 0% in the 0% tax bracket. Up to you decide whether that's more or less confusing than having a basic credit instead of a 0% bracket.
Deal Fanatic
Jan 19, 2017
5610 posts
3133 upvotes
I don't know why people have to invent different terms. lets just call them the way CRA is calling them. Tax bracket 1($0 - $49020), tax bracket 2 ($49020 and $98040), personal exemption amount ($13808).
Member
Apr 16, 2015
472 posts
682 upvotes
btwpg999 wrote: Perhaps it is easier to understand if I ask this:
if 0-13808 is NOT an income bracket with zero tax, under what circumstances would a person actually pay any tax if their income was between 0 and 13808?
It doesn't matter to most people whether it is a 0% bracket or a credit - the end result is no tax on the first $13K, BUT it does matter in some special circumstances like part-year residents and bankrupts, who may only be able to claim part of the basic exemption. It also matters for trusts and estates, who can't claim the basic personal amount and have to pay tax from the first $ of income.
bubak wrote: Lots of the complexity in the tax calculation is for political reasons, politicians wanting to raise taxes without admitting that they are raising taxes, so they come up with crazy math tricks.
And lots of it is complex because it needs to address multiple situations. Just because you don't understand the reason behind something, doesn't mean it's a conspiracy. The math can be crazy at times, but it's not always a trick.

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