Personal Finance

Progressive Tax System Canada - Example

  • Last Updated:
  • Aug 27th, 2016 1:42 pm
[OP]
Member
Aug 4, 2013
203 posts
12 upvotes

Progressive Tax System Canada - Example

Hi,

Many countries use a progressive tax system. Let us work thru the case study below.

Combined Provincial and Federal Tax Rates

$0 - $9,900 - 0%
next $5000 - 9%
next 15000 - 21%
next $30,000 - 35%

Lets say you look for a job in 2016 but find one in June 2016 paying $55,000, the tax year end is March 2017.

When this employee starts working ($4583/ month), the first bi-weekly pay check will be $2291 gross. This first payment is still under $9,900 so should not be taxed at all. I have seen this first hand in other countries - you get the full $2291 and the next $2291 until you reach the $9,900 threshold. Maybe they can take away only CPP but no income tax.

But as far as I know, I have never seen this happen in Canada - they always deduct tax! CRA cannot make me a tabulation to show how the progressive tax worked out.

Has anyone made this enquiry with CRA i.e. asking CRA to demonstrate that they were taxed progressively and no tax taken out of the first tax free tax bracket?
6 replies
Deal Addict
Jan 16, 2016
1444 posts
1095 upvotes
Hamilton, ON
sexyboi wrote: Hi,

Many countries use a progressive tax system. Let us work thru the case study below.

Combined Provincial and Federal Tax Rates

$0 - $9,900 - 0%
next $5000 - 9%
next 15000 - 21%
next $30,000 - 35%

Lets say you look for a job in 2016 but find one in June 2016 paying $55,000, the tax year end is March 2017.

When this employee starts working ($4583/ month), the first bi-weekly pay check will be $2291 gross. This first payment is still under $9,900 so should not be taxed at all. I have seen this first hand in other countries - you get the full $2291 and the next $2291 until you reach the $9,900 threshold. Maybe they can take away only CPP but no income tax.

But as far as I know, I have never seen this happen in Canada - they always deduct tax! CRA cannot make me a tabulation to show how the progressive tax worked out.

Has anyone made this enquiry with CRA i.e. asking CRA to demonstrate that they were taxed progressively and no tax taken out of the first tax free tax bracket?
It's obviously in the government's best interest to amortize the amount of tax they take from you over the entire year as opposed to the way you've suggested.

Payroll systems would also need to be reprogrammed for that scenario.

Finally, it's not predictable, and people don't like when they aren't in control. One day they see they get X deposited into their account, the next pay they get Y.
Deal Addict
Apr 12, 2005
1425 posts
180 upvotes
sexyboi wrote: Hi,

Many countries use a progressive tax system. Let us work thru the case study below.

Combined Provincial and Federal Tax Rates

$0 - $9,900 - 0%
next $5000 - 9%
next 15000 - 21%
next $30,000 - 35%

Lets say you look for a job in 2016 but find one in June 2016 paying $55,000, the tax year end is March 2017.

When this employee starts working ($4583/ month), the first bi-weekly pay check will be $2291 gross. This first payment is still under $9,900 so should not be taxed at all. I have seen this first hand in other countries - you get the full $2291 and the next $2291 until you reach the $9,900 threshold. Maybe they can take away only CPP but no income tax.

But as far as I know, I have never seen this happen in Canada - they always deduct tax! CRA cannot make me a tabulation to show how the progressive tax worked out.

Has anyone made this enquiry with CRA i.e. asking CRA to demonstrate that they were taxed progressively and no tax taken out of the first tax free tax bracket?
There is nothing to do with progress tax rate when the employer starts deducting taxes from your first pay cheque. You will get your taxes back when you file your income tax return next year if your total income for the year is less than the personal excemption amts. you can consider the deductions as temp holding by the gov't. The gov't needs the tax money through the year to pay it's bills. They can' t wait until next year to collect the taxes from everyone. It is like you are getting paid every 2 weeks, instead of your employer holding your pay until the next year to pay you. Since your employer or the gov't don't know how much you will make in the whole year, they can only base on your each pay cheque amt to determine how much taxes to deduct for that pay cheque. I.e. No tax will be deducted for that month if you make $800 in one month because they assume your total income will be $9600 in one year if you will make the same $800 per month for the whole year. But if you make $2000 in another month, they will deduct tax for that month based on yearly income of $24000 assuming you will make the same $2000 month income for the 12 months in that year.
Deal Addict
Jan 30, 2012
1525 posts
871 upvotes
TORONTO
sexyboi wrote: Many countries use a progressive tax system. Let us work thru the case study below.
Is this your homework? :)
sexyboi wrote: Lets say you look for a job in 2016 but find one in June 2016 paying $55,000, the tax year end is March 2017.

When this employee starts working ($4583/ month), the first bi-weekly pay check will be $2291 gross.
No, it isn't. It is true that $55,000 divided by 12 is $4583.33.

Bi-weekly is a term that should not be used, because it is not well-defined. It has two meanings: twice a week, and every two weeks. Both are valid.

But let's assume you are using the every two week meaning. $4583 divided by 2 is $2291.50, but you've made the false assumption that there are 4 weeks in a month. That's only true in February in a non-leap year. Every other month has more than 4 weeks. If you take $55k divided by 52 x 2 you get $2115.38 per 2-week pay period.

And even then, you might notice that a year has more than 52 weeks: 365 days divided by 7 days/week is 52.14 weeks per year. 52 weeks x 7 = 364 days, leaving you short one day.
sexyboi wrote: This first payment is still under $9,900 so should not be taxed at all. I have seen this first hand in other countries - you get the full $2291 and the next $2291 until you reach the $9,900 threshold. Maybe they can take away only CPP but no income tax.

But as far as I know, I have never seen this happen in Canada - they always deduct tax!
You don't understand the difference between tax and a tax withholding.

On every paycheque there is a tax withholding according to rules set by CRA. This is the result of form TD1 ( http://www.cra-arc.gc.ca/formspubs/frms/td1-eng.html ) that you filled out when you started the new job.

Every year when you file your taxes there is a reconciliation between the amount of tax you should pay and the amount of tax that was withheld, and either you owe the govt some money or the govt owes you money.

It is to your advantage to minimize the tax withholding, because that means the govt gave you an interest free loan (but on the other hand, that means you have to save your money and have enough on hand to pay the tax owing when you file your taxes).
sexyboi wrote: Has anyone made this enquiry with CRA i.e. asking CRA to demonstrate that they were taxed progressively and no tax taken out of the first tax free tax bracket?
Have you ever filed an income tax return? I'm guessing not. CRA calculates the tax brackets correctly
Deal Addict
Jan 2, 2015
1533 posts
528 upvotes
Toronto, ON
sexyboi wrote: Hi,

Many countries use a progressive tax system. Let us work thru the case study below.

Combined Provincial and Federal Tax Rates

$0 - $9,900 - 0%
next $5000 - 9%
next 15000 - 21%
next $30,000 - 35%

Lets say you look for a job in 2016 but find one in June 2016 paying $55,000, the tax year end is March 2017.

When this employee starts working ($4583/ month), the first bi-weekly pay check will be $2291 gross. This first payment is still under $9,900 so should not be taxed at all. I have seen this first hand in other countries - you get the full $2291 and the next $2291 until you reach the $9,900 threshold. Maybe they can take away only CPP but no income tax.

But as far as I know, I have never seen this happen in Canada - they always deduct tax! CRA cannot make me a tabulation to show how the progressive tax worked out.

Has anyone made this enquiry with CRA i.e. asking CRA to demonstrate that they were taxed progressively and no tax taken out of the first tax free tax bracket?
Link: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/ ... u-eng.html

You would need to speak to Business Enquiries, not regular. The tables shown there approximate the tax being taken throughout the year. If your income is low you'll effectively be overtaxed at the beginning of the year and undertaxed at the end, most likely resulting in a small refund. If your income is high... you'll probably get the same, assuming your income is from employment (and not self-employment). Most people get refunds because they don't ask for tax credits on the TD1, and if they have multiple jobs they tend to be undertaxed because they asked for the basic personal amount more than once.

If being "undertaxed at the beginning of the year" is a burden and your income is low, ask for Working Income Tax Benefit advance payments.
Deal Addict
User avatar
Sep 4, 2005
2867 posts
638 upvotes
Toronto
It's easier all around for the government to over collect and you get it back when you file the following April.

How would your new boss/payroll for your new job in June know if you came from unemployment vs say a higher paying job? I wouldn't disclose to them that I've made $0 the whole year leading up to this job.
Deal Addict
May 12, 2014
2513 posts
2144 upvotes
Montreal
sexyboi wrote: I have seen this first hand in other countries - you get the full $2291 and the next $2291 until you reach the $9,900 threshold.
I'm curious, can you name a single country where this happens?

It would be impossible for your employer to do this correctly since he doesn't know if you have other sources of income. From an employee point of view, their salary would fluctuate "unpredictably" unless they're paying close attention to the tax tables. Most people have a hard enough time budgeting when their salary is the same all year.

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