What Is Income Tax? A Simple Guide for Canada
A simple guide to income tax in Canada: what it is, who collects it, how federal and provincial taxes work together, and what comes off a paycheque.
Income tax is the biggest tax most working Canadians pay, and the vocabulary around it can make it feel more complicated than it is. This guide explains the basics in plain words: what income tax is, who collects it, and why your paycheque is smaller than your salary.
The short answer
Income tax is money the government collects from what you earn. That includes wages and salaries, tips, self-employment income, and most investment income. The more you earn, the more you pay, both in dollars and (up to a point) as a share of your income. That's because Canada uses a progressive tax built on brackets, which our guide on how tax brackets work in Canada explains step by step.
Two governments tax the same paycheque
Canadian income tax always has two parts:
- Federal income tax. The same brackets and rates across the country.
- Provincial or territorial income tax. Each of the 13 provinces and territories sets its own brackets and rates, added on top of the federal tax.
For most of the country, both parts are handled in one tax return collected by the Canada Revenue Agency (CRA). Quebec is the exception: it runs its own income tax through Revenu Québec, and Quebec residents file two returns. Every province and territory page on this site shows the two parts together for an income you pick.
Income tax is not the only thing off your paycheque
Two other deductions come off most paycheques and are often mistaken for income tax:
- CPP (or QPP in Quebec): required pension contributions with their own rate and yearly maximum.
- EI: employment insurance contributions, also with their own rate and maximum.
These are separate from income tax and have their own rules. Together with income tax, they make up the difference between your salary and your take-home pay.
The tax applies to taxable income, not your whole salary
Income tax is calculated on your taxable income: your income after deductions such as RRSP contributions. On top of that, credits reduce the tax itself, most importantly the basic personal amount, which removes tax on the first part of everyone's income.
From there, the brackets split your taxable income into parts and tax each part at its own rate, once federally and once provincially. Our calculator does the full math for any income, including CPP, EI, and the basic personal amount, and the glossary defines every term used here.
Sources
Frequently asked questions
What is income tax?
Income tax is money the government collects from what you earn, including wages, self-employment income, and most investment income. In Canada it pays for services like health care, education, and income supports, and it is the largest source of federal revenue.
Who collects income tax in Canada?
The Canada Revenue Agency (CRA) collects federal income tax, and for most provinces it collects the provincial tax at the same time through one tax return. Quebec is the exception: Revenu Québec collects Quebec's tax with its own return.
Are CPP and EI the same as income tax?
No. CPP (pension) and EI (employment insurance) are separate required contributions with their own rates and yearly maximums. They come off your pay in addition to income tax.
Do all provinces charge income tax?
Yes. Every province and territory has its own income tax with its own brackets and rates, charged on top of the federal tax. That's why the same salary is taxed differently across the country.
Why is my paycheque smaller than my salary?
Employers deduct estimated income tax from each paycheque and send it to the government during the year, along with CPP and EI contributions. When you file your return, you settle the difference: a refund if too much was deducted, a payment if too little.