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The income tax formula for a Canadian individual is short: taxable income, times the rate for each bracket, minus credits. The Income Tax Act says it in section 2, where the tax is paid on “taxable income”, and taxable income is your income for the year, plus additions and minus deductions. Everything else in a return is detail about what belongs in each of those steps.
What are the steps of the formula?
Work through them in this order and the return stops looking mysterious.
- Add up your income from all sources: pay, business, interest, the taxable part of gains and the grossed-up part of dividends.
- Take off deductions such as RRSP contributions and the extra layer of CPP. What’s left is taxable income.
- Apply the federal brackets, then your province’s brackets.
- Subtract non-refundable credits. Federal credits take off 14% of the amount claimed.
- Add anything extra, such as the Ontario surtax or Health Premium, and take off tax already withheld.
A positive result is what you owe. A negative one is your refund.
What are the 2026 rates?
The brackets are marginal, which means each rate only touches the slice of income inside it. Here are the federal ones from the CRA.
| Federal taxable income | Rate |
|---|---|
| Up to $58,523 | 14% |
| $58,523 to $117,045 | 20.5% |
| $117,045 to $181,440 | 26% |
| $181,440 to $258,482 | 29% |
| Over $258,482 | 33% |
Ontario adds five brackets of its own, from 5.05% up to 13.16%. Other provinces have different scales, and the marginal tax rate calculator will show yours.
How does the formula work on $60,000?
Take an Ontario employee on a $60,000 salary. CPP contributions of $3,361.75 include an extra layer added in recent years, and that layer is deducted, so taxable income is $59,435 in our estimate.
Federal tax on $59,435 is $8,193.22 on the first $58,523, plus $186.96 on the $912 above it, so $8,380.18 before credits. The credits our tool uses are the basic personal amount of $16,452, the Canada employment amount of $1,501, EI premiums of $978 and the base part of CPP. Together they take $3,041.88 off, which leaves federal tax of $5,338.30.
Ontario tax is $2,982.20 in the tool, which includes a Health Premium of $600. We confirmed the top premium for each income tier but not how it climbs inside one, so treat that last figure as an estimate. Total income tax comes to $8,320.50. The income tax calculator runs the same steps for any income and province.
Does a deduction help more than a credit?
Usually, yes. A deduction cuts taxable income, so it saves tax at your marginal rate. A credit gives you 14% federally whatever your income, which is a flat rate and often smaller than your marginal one. Add a $5,000 RRSP deduction to a $60,000 pay and $4,000 of gains, and our tool drops tax from $8,913.50 to $7,566.72, a saving of $1,346.78. The same $5,000 as a credit amount would save $700 federally.
Want to see the effect for yourself? Try the tax refund calculator with different deduction amounts.
Where the income tax formula trips people up
Most mistakes come from confusing the average rate with the marginal one. Earning $60,000 doesn’t mean 20.5% on all of it. It means 14% federally on the first slice and 20.5% only past $58,523.
Payroll deductions aren’t income tax either. CPP and EI come off your pay on top, so take-home is lower than the tax figure suggests. And the capital gains inclusion rate we use is 50%, which is our working figure because the CRA pages we found don’t state the 2026 rate. The plan to raise it to two-thirds was cancelled in a release dated 21 March 2025.
Self-employed people work out the same formula with business income, but CPP works differently, and the self-employed tax calculator covers it, without EI.
Where the numbers come from
Federal brackets and credit amounts are the 2026 figures on canada.ca from the Canada Revenue Agency. The formula wording is from sections 2 and 3 of the Income Tax Act on the Justice Laws website. Ontario rates come from the province’s 2026 figures. This is an estimate and leaves out many claims.
Frequently asked questions
What is the formula for income tax in Canada?
Taxable income times the rate for each bracket, minus non-refundable credits, plus any surtax or premium, minus tax already withheld.
What is taxable income?
Your income for the year, plus the additions and minus the deductions the Income Tax Act allows.
Is a deduction better than a credit?
At $60,000 in Ontario, a deduction saves tax at your marginal rate, which is higher than the 14% federal credit rate.
Does each rate apply to all your income?
No. Each rate applies only to the slice of income inside that bracket.
Are CPP and EI part of the formula?
They are payroll deductions on top of income tax, though the extra CPP layer is deducted and the base part earns a credit.
- How Canadian income tax works: brackets and credits
How federal and provincial Canadian income tax stack up, what marginal and average rates mean, and how credits and deductions change your bill
Information only. This page is general information, not tax, legal or accounting advice. Tax-Services.ca is an independent publisher: we don't prepare or file tax returns or offer tax services, and we have no connection with the CRA, Revenu Québec, any government or any company named on this page. Check the figures that matter with an official source or a qualified professional.