Understanding the Canadian Tax
Canada's tax system is progressive, meaning that individuals are taxed at increasing rates as their income rises. This can sometimes be confusing, especially when trying to understand the difference between your marginal tax rate, average tax rate, and how much you will actually owe in taxes based on your income. In this post, we'll take a closer look at how taxes are calculated in Canada, specifically in Ontario, and break down how taxes would be calculated for someone earning $250,000 per year, as a salary.
The Basics of the Canadian Tax System
In Canada, taxes are levied at both the federal and provincial levels. The federal government collects taxes on income across the entire country, while each province, including Ontario, has its own set of tax brackets and rates. This means that the total amount of taxes you owe is a combination of federal and provincial taxes.
The Canadian tax system is progressive, meaning the more you earn, the higher the rate of tax you will pay on your income. However, you don't pay the highest tax rate on all your income; instead, it is applied to portions of your income that fall within specific tax brackets. This is where the concepts of marginal tax rate and average tax rate come into play.
Marginal Tax Rate vs. Average Tax Rate
Before diving into how taxes would be calculated for someone earning $250,000, it's important to understand two key tax terms:
Marginal Tax Rate: This refers to the tax rate applied to the last dollar you earn. As your income rises, your marginal tax rate increases, meaning each additional dollar of income is taxed at a higher rate than the previous dollar.
Average Tax Rate: This is the percentage of your total income that you pay in taxes. The average tax rate is calculated by dividing the total amount of tax you owe by your total income. It gives you an idea of the effective tax rate across your entire income.
Now, let's break down how taxes would be calculated for an individual earning $250,000 annually in Ontario.
Federal Tax Brackets for 2025
The federal government applies income tax in Canada through a series of tax brackets. For 2025, the federal tax brackets are as follows:
15% on the first $57,375
20.5% on income over $57,375 up to $114,750
26% on income over $114,750 up to $177,882
29% on income over $177,882 up to $253,414
33% on income over $253,414
*Note: This does not include the basic personal amount, which is between $14,538 and $16,129*
Ontario Provincial Tax Brackets for 2025
Ontario also applies its own provincial tax, which is in addition to the federal tax. Here are the provincial tax brackets for Ontario in 2025:
5.05% on the first $47,630
9.15% on income over $47,630 up to $95,260
11.16% on income over $95,260 up to $150,000
12.16% on income over $150,000 up to $220,000
13.16% on income over $220,000
Breaking Down Taxes for a $2500,000 Income
Now, let’s calculate the taxes for someone with an income of $2500,000 per year. For simplicity, we’ll assume there are no deductions or credits involved in this example.
Federal Tax Calculation:
First $57,375 is taxed at 15%:
$57,375 * 0.15 = $8,606.25Next $57,375 (from $57,375 to $114,750 is taxed at 20.5%:
$57,375 * 0.205 = $11,761.88Next $63,132 (from $114,750 to $177,882) is taxed at 26%:
$63,132 * 0.26 = $16,414.32Next $72,118 (from $177,882 to $250,000) is taxed at 29%:
$72,118 * 0.29 = $20,914.22
Total federal tax = $8,606.255 + $11,761.88 + $16,414.32 + $20,914.22 = $57,696.67
Ontario Provincial Tax Calculation:
First $52,886 is taxed at 5.05%:
$52,886 * 0.0505 = $2,670.74Next $52,889 (from $52,886 to $105,775) is taxed at 9.15%:
$52,889 * 0.0915 = $4,839.34Next $44,225 (from $105,775 to $150,000) is taxed at 11.16%:
$44,225 * 0.1116 = $4,935.51Next $70,000 (from $150,000 to $220,000) is taxed at 12.16%:
$70,000 * 0.1216 = $8,512.00Remaining $30,000 (from $220,000 to $250,000) is taxed at 13.16%:
$30,000 * 0.1316 = $3,948.00
Total provincial tax = $2,670.74 + $4,839.34 + $4,935.51 + $8,512.00 + $3,948.00 = $24,905.59
Total Taxes Owed
Now, let's add up the federal and provincial taxes:
Federal tax: $57,696.67
Provincial tax: $24,905.59
Total taxes owed = $59,285.92 + $25,330.98 = $82,602.26
Marginal and Average Tax Rates
To understand the impact of taxes on the overall income:
Marginal tax rate: Since the last portion of income ($250,000) is taxed at 33% (federally) + 13.16% (provincially), the total marginal tax rate is 46.16%.
Average tax rate: The average tax rate is calculated as the total taxes paid divided by total income:
$82,606.26 ÷ $250,000 = 33.04%.
Other Deductions
It is important to also understand that, on top of the income taxes that are paid, there are also other deductions that happen, before the money goes into the bank account. Things like CPP, EI and potentially group benefits all also take a slice out of the pie. For example, in 2025 for anyone earning over $71,300 per year as an employed salary, will pay $4034.10 towards their CPP, that will be deducted directly from the gross salary. Also, anybody earning $65,700 or more will pay $1077.48 towards EI, which will also be deducted directly from the gross salary.
Using the above example of $250,000 income, this would be an additional $5,111,58 that ‘disappears’ before the money even hits the account. All in all, someone earning $250,000 can be looking at almost $90,000 deducted from their paycheque, in one form or another. This is a significant amount of money!
Business Owners/Incorporated Individuals
For those who are business owners or incorporated, the calculation isn’t so cut and dry as above. Business owners and Incorporated Individuals have additional avenues for reducing taxes and structuring their compensation, that are not available to salaried employees. This allow for more creative planning and opportunities for lower taxes. For example, with a business generating $250,000 in revenue, they are able to deduct expenses first and then pay taxes on the remainder, whereas an individual on salary, pays taxes (and other deductions) first, and THEN pays expenses from what's left.
Also, for those businesses with a net income of less than $500,000, they are able to take advantage of the Small Business Deduction of 12.2% (combined federal and provincial [Ontario]). The other benefit is, if the full amount of funds are not needed, they don’t need to be paid out from the business as a salary to the business owner. This allows for lower overall taxes paid for the amount that is not paid out, after expenses are deducted.
It is also very important to make sure that you are in consultation with a qualified Tax Specialist, to ensure that you are structuring your compensation in the most efficient and effective way.
For someone earning $250,000 in Ontario in 2025, the total tax bill would amount to $82,606.26, which includes both federal and provincial taxes, with additional deductions for social security. The marginal tax rate they face is 46.16%, while their average tax rate across the entire income is about 33.04%.
It’s important to remember that tax rates and brackets can change, and additional factors such as tax credits, deductions, and other sources of income can affect the overall tax calculation. However, understanding these basic principles will help you get a clearer picture of how taxes are calculated and what to expect on your tax return.
In the climate of high taxes, tax planning and strategizing is extremely important, to try to keep as much money in your pocket as possible. Having a well thought out Financial Plan, incorporating multiple strategies and structures is often the key to success, especially for Higher Income and High Net Worth Individuals. To see if you’re taking advantage of all the available strategies, or to do a consultation of your situation, get in touch with us!