Canadian Income Tax, RRSP & TFSA Basics
Progressive federal and provincial tax, RRSP vs TFSA, and CPP/EI paycheck deductions explained for Canadian workers.
By Prosperics Editorial Board · DIGITI LLC
Prosperics is published by DIGITI LLC, a California company. Calculators and guides are written and maintained by the Prosperics editorial board. Figures are checked against primary sources — IRS, CRA, SSA, and central bank publications — and each page shows the date it was last reviewed.
How Canadian Tax Brackets Work
Canada uses a progressive tax system where you pay different rates on different portions of your income. You pay both Federal and Provincial taxes.
For example, if you earn $60,000 in Ontario: - The first ~$55,000 is taxed at the lowest bracket (Federal 15% + Provincial 5.05%). - Only the remaining $5,000 is taxed at the next bracket.
Moving to a higher bracket only affects the income *above* the threshold. It does not mean your entire salary is taxed at the higher rate.
Your "Marginal Tax Rate" is the tax you pay on your next dollar earned. Your "Average (Effective) Tax Rate" is the total tax paid divided by total income—this is always lower than your marginal rate.
Key takeaways
- ✓You pay Federal + Provincial income taxes
- ✓Tax is progressive: higher rates apply only to income above thresholds
- ✓A raise always puts more money in your pocket
RRSP vs. TFSA: Which Should You Choose?
The Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) are the two pillars of Canadian saving.
**RRSP (Registered Retirement Savings Plan):** - Contributions are tax-deductible (reduce your income tax today). - Growth is tax-deferred. - Withdrawals are taxed as income. - Best for: High-income earners who want to lower their current tax bill and expect to be in a lower bracket in retirement.
**TFSA (Tax-Free Savings Account):** - Contributions are with after-tax dollars (no deduction). - Growth and withdrawals are 100% tax-free. - Best for: Lower/middle-income earners, saving for short-term goals, or if you expect to be in a higher tax bracket later.
A common strategy is to use your RRSP to lower your net income (and get a refund), then invest that refund into your TFSA.
Key takeaways
- ✓RRSP: Tax deduction now, taxed later. Good for high earners.
- ✓TFSA: Taxed now, tax-free forever. Flexible for any goal.
- ✓Check your CRA My Account for your contribution limits.
Understanding Your Paycheck Deductions (CPP & EI)
In Canada, your employer deducts mandatory contributions from your pay before you see it.
**CPP (Canada Pension Plan):** - Funds your future pension. - You contribute ~5.95% of earnings between the basic exemption ($3,500) and the maximum pensionable earnings (~$68,500). - Employers match this contribution.
**EI (Employment Insurance):** - Provides temporary income if you lose your job. - You contribute ~1.63% of insurable earnings up to a maximum. - Employers pay 1.4x your contribution.
You also see Federal and Provincial income tax withheld. These are estimates. When you file your tax return (T1), you calculate the actual tax owed. If you overpaid, you get a refund.
Key takeaways
- ✓CPP funds your retirement pension
- ✓EI provides safety net for job loss
- ✓Deductions stop once you hit the annual maximum (YBE/MPE)
Sources
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Educational content only. Not financial, legal, or tax advice.