Canada Tax Guide for Beginners: How Income Tax Works in Canada

Canada uses a self-assessment tax system: each year you (or your software) work out what you owe and file a return with the Canada Revenue Agency (CRA). Both the federal government and your province or territory tax your income, and the rates rise in layers as income goes up. This guide explains how those pieces fit together, from brackets to credits to the refund at the end. For the filing itself (slips, software, NETFILE, deadlines), see the guide to filing a tax return in Canada.

The basics in one table

How your tax is calculated

Total income (employment, self-employment, investments, benefits)
- Deductions (RRSP contributions, child care, union dues...)
= Taxable income
x Federal and provincial tax rates, bracket by bracket
- Non-refundable tax credits (basic personal amount and others)
= Tax payable
- Tax already withheld or paid by instalments
= Refund or balance owing

The T1 General explainer shows the return’s line numbers for each of these steps.

How brackets work

The federal government has five brackets. You pay each rate only on the slice of income inside that bracket, not on your whole income. These are the current federal rates; your province adds its own brackets on top.

Source: Canada Revenue Agency – Canadian income tax rates for individuals, 2026. View source. Verified September 5, 2026.

Thresholds are indexed to inflation each year. The federal and provincial tax brackets page has every province’s rates.

Example: $80,000 of employment income in Ontario

That is an effective rate of about 18.4%, while the marginal rate on the next dollar is 29.65% (20.5% federal plus 9.15% Ontario). The example leaves out CPP and EI contributions, other credits, and the Ontario surtax and health premium, which the Ontario income tax page covers. The marginal rate is the one that matters for decisions about RRSP contributions, side income and deductions; the marginal tax rate calculator gives it for any income and province, and the income tax calculator gives the full bill.

Provincial tax

Each province and territory sets its own brackets and credits, and the province you live in on December 31 taxes your whole year’s income. Provincial tax is calculated on the same taxable income as federal tax, using the province’s own form. Combined top rates differ by several percentage points across the country; the lowest-tax provinces comparison ranks them, and each province’s page under the tax brackets hub lists its rates.

What’s taxable?

Capital gains are taxed by adding the taxable part of the gain to your income: the capital gains inclusion rate page explains the rate and its history, and the capital gains tax calculator works out the tax on a sale.

Deductions and credits

The two main ways to lower the tax bill work differently, as the page on the difference between a tax deduction and a tax credit explains in detail.

• A deduction reduces taxable income before tax is calculated, so it saves tax at your marginal rate. An RRSP contribution is the best-known example: the same contribution saves more tax for someone in a high bracket than in a low one. Other common deductions are child care expenses, union and professional dues, moving expenses for a move of 40 km or more closer to a new job or school, and employment expenses your employer certifies on a Form T2200.
• A non-refundable credit reduces the tax itself, at the lowest federal rate for most credits, so it is worth the same to everyone who has tax to reduce. It can bring your tax to zero but not below. The basic personal amount ($16,452 federally) is the credit everyone gets; others include the age amount, the disability amount, the medical expense tax credit, donations and the tuition tax credit.
• A refundable credit or benefit is paid to you even if you owe no tax. The Canada Child Benefit, the Canada Groceries and Essentials Benefit (formerly the GST/HST credit) and the Canada Workers Benefit are all worked out from your return, which is why filing matters even with little or no income.

The federal Canada Carbon Rebate ended with the consumer carbon tax in April 2025. The deductions and credits hub lists every claim, and ways to pay less tax covers the strategies that use them.

Refund or balance owing?

Your employer withholds tax from each paycheque based on your TD1 form and the CRA’s payroll tables. The return squares that up with the tax you actually owe.

A big refund every year usually means too much tax is being withheld; am I paying too much tax explains how to reduce withholding at source. If you owe, or your refund shrank, why do I owe taxes this year goes through the causes.

CPP and EI at a glance

Two payroll contributions come off most paycheques alongside income tax:

Higher earners also pay CPP2 on earnings between the YMPE and a second ceiling. The CPP contribution rates page and the EI contribution rates page have the full detail, and self-employed people pay both the employee and employer shares of CPP.

Registered accounts

Taxes in other situations

• Self-employment. Business income goes on Form T2125 with your personal return, and you can deduct legitimate business expenses. The first-time self-employed taxes guide covers registration and payments.
• Investments. Interest is fully taxable, eligible Canadian dividends get the dividend tax credit, and foreign income is taxable with a foreign tax credit for tax paid abroad.
• Your home and rentals. Selling your home is usually tax-free under the principal residence exemption; rental income is taxable after expenses, as the landlord tax guide explains.
• Retirement income. CPP, OAS and pension income are taxable. If your net world income is above the threshold ($93,454 of 2025 income), you repay 15% of the amount above it as recovery tax, taken from the OAS payments for the July 2026 to June 2027 period; the pension is fully recovered at about $152,062 (under 75) or $157,923 (75 and over). Pension income splitting can move up to half of eligible pension income to a spouse.
• Instalments. People with income that has little or no tax withheld (self-employment, rental or investment income) may have to pay tax instalments during the year.
• Students. Students file to claim tuition and unlock benefits; taxes on a co-op placement covers work terms.
• EI. EI benefits are taxable, and higher earners may have to repay part of them at tax time; see how much you can earn on EI before repaying.
• Couples and families. Common-law partners are treated like married spouses for tax after they meet the CRA’s test (am I common-law for tax purposes), but each person files their own return (how couples file taxes). Income on money given to a spouse can be taxed back to the giver under the attribution rules.
• Gifts and inheritances. Canada has no gift or inheritance tax, but a deemed disposition at death can create tax on the final return, which filing taxes for a deceased person covers.
• CRA reviews and debts. Most CRA letters are requests for information rather than audits; the CRA hub covers audits, disputes and what happens if you can’t pay.

Key dates

The tax year is the calendar year, the return is due April 30 (June 15 for the self-employed, with payment still due April 30), and the RRSP deadline for the previous year falls 60 days after the year ends. The full calendar is on the tax deadlines page, and tax changes for next year lists the amounts that change each January.

The taxes section lists every tax hub on the site, from income tax and benefits to real estate and corporate tax.