Trouble grasping the subtleties of taxation? That’s exactly what the firm Mackenzie Financial wanted to discover when they developed a tax knowledge test(This hyperlink will open in a new tab) (French only). The results? The average Canadian was only able to answer 3 out of 10 questions correctly. The lowest scores were in Quebec. Just 41% got one correct answer out of ten (or less) on the tax test.

Let’s clear things up a little with some taxation basics.

Why should I care about my tax rate?

There’s a common misconception that people who earn over $100,000 lose half their salary to taxes.

In reality, determining your tax rate is a bit more complex than just looking at total income.

Let’s keep things simple.

In Quebec and Canada, taxes are progressive. That means tax rates increase based on income brackets (commonly called tax brackets). The higher your income, the higher the tax rate, but only on the portion of income that falls within each bracket.

Do you know your marginal tax rate? This is the combined provincial and federal tax rate you pay on the last portion of your taxable income.

Let’s break this down with an example... say you earn $60,000 per year.

2025 tax table

Will you pay 36.1% on the entire $60,000? The answer is no. The 36.1% applies only to the last $2,625 of your income (60,000 - 57,375 = 2,625).

Then, you go move down, one bracket at a time.

• $4,119 (57,374 - 53,255 = 4,119) taxed at 31.5%.
• $34,638 (53,254 - 18,571 = 34,638) taxed at 26.5%.
• $2,350 (18,570 - 16,129 = 2,350) taxed at 12.5%.
• $16,128 taxed at 0%.

Marginal vs average rate

To determine the total amount of tax paid on a $60,000 income, we refer to the average tax rate. This is the tax amount paid per bracket in relation to your taxable income.

In our example, the average tax rate on the $60,000 income is 19.6%.

So, the actual tax paid on $60,000 is 19.6% of the total income. However, in reality, you will have paid 0% taxes on your first dollars earned and 36.1% on your last dollars earned.

What’s the difference between total and taxable income?

Your total income includes all the money you earned in a year:

• Employment 
• Investments such as interest and capital gains 
• Pension and retirement income 
• Social assistance 
• Self-employment earnings 
• Dividends
• Etc.

This amount is gross income, meaning no deductions (taxes, payroll deductions, employment insurance, union dues, etc.) have been applied yet.

• The value of inherited property 
• An amount received from a life insurance policy
• A strike allowance
• Family allowances 
• Lottery winnings
• Etc.

Taxable income is your total income minus taxes and tax deductions. It’s used to determine the amount of tax you owe.

What’s the difference between a deduction and a tax credit?

Reduce the taxes you must pay by claiming the deductions and tax credits that apply to your situation.

Sound interesting? Then you need to file your tax returns to be eligible.

Now, what’s the difference between the two?

What’s a deduction?

Tax deductions(This hyperlink will open in a new tab) lower your taxable income. Some of the most common deductions include:

• Contributions to your RRSP and pension plan
• Teleworking expenses
• Childcare expenses
• Financial expenses
• Alimony payments
• Repayment of a scholarship

Deductions do not necessarily result in a tax refund. But, they can lower your taxable income enough to reduce your tax rate.

What’s a tax credit?

There are two types of tax credits(This hyperlink will open in a new tab):

• Non-refundable
• Refundable

Non-refundable tax credits reduce the amount of tax to be paid but do not lower your taxable income. If the total exceeds the tax amount you owe, you will pay nothing. Some examples include:

• Medical expenses
• Charitable donations
• Purchase of a home
• Tuition fees
• Amount for a person living alone

Refundable tax credits provide a refund or periodic payments regardless of whether you owe taxes. Examples include: The GST/HST credit or the tax credit for labour-sponsored funds(This hyperlink will open in a new tab).

How can I reduce the tax amount I have to pay?

Let’s be honest, we all prefer a tax refund rather than owing thousands of dollars.

If you want to pay less, here are some strategies:

• Contribute to your RRSP Your contribution lowers your taxable income. Double benefit: The lower your taxable income, the higher your family allowance benefits could be. Additionally, any investment growth remains tax-free until you withdraw funds from your RRSP. The goal is to defer tax payments until retirement when your tax rate may be lower.
• Contribute to a TFSA A TFSA allows your savings to grow tax-free. TFSA contributions do not lower your taxable income. However, all gains remain tax-free, even when you make withdrawals.
• Contribute to a labour-sponsored fund Contributions to funds like the Fonds de solidarité FTQ or Fondaction offer a tax credit of up to $5,000 per year.
• Split your retirement income If you have a high tax rate, you can split your income with your spouse if they have a lower tax rate.

Is it mandatory to file tax returns?

There’s an old saying that goes “Nothing is certain except death and taxes.” It’s hard to avoid taxes when you earn income (as an employee or if you’re self-employed) and deductions are taken from your pay.

The list of reasons to file your tax return(This hyperlink will open in a new tab) is long. But even if you think you don’t earn enough, here are a couple of benefits for filing your tax return:

• Receiving a refund due to deductions and tax credits
• Recovering source deductions that may have been over-withdrawn by your employer

Are there fees if I file my taxes late?

It depends on your situation.

Filing after April 30 can be costly if you owe a balance to the Canada Revenue Agency or Revenu Québec. Late filing results in penalties and interest.

On the other hand, if you’re entitled to a tax refund, you won’t have to pay any fees for filing late.

If you need more help

The best people to help you understand tax principles and their impact on your finances are financial advisors. They can also consult accountants or tax specialists to answer all your questions.