President's Advisory Panel for Federal Tax Reform

President’s Advisory Panel for Federal Tax Reform (Photo credit: Wikipedia)

I’m going to have to pay myself a salary soon, and I’ve been learning a lot about the different taxes that one has to pay, both on the employer and the employee side of the equation! Canada has always been known for having a relatively high level of taxation, but as I’ll soon show you, there’s a significant difference between the east and the west sides of the country.

In this post, I’ll be working with Joe, a typical middle-class Canadian worker. Joe earns $50,000 a year.

Below is a chart of the situation between the different provinces, sorted by total payroll and income taxes in ascending order:

Chart of salary and Payroll Costs in the 10 Provinces, 2012

Salary and Payroll Costs in the 10 Provinces, 2012

The provinces with the lowest payroll and income taxes are the three western provinces: British Columbia, Alberta, and Saskatchewan. The highest taxes are out east, with Québec taking the cake. Joe would be better off if he could find work out west, though he might want to watch out for those nasty Vancouver real-estate prices!

What does the chart itself mean? Well, the blue portion is what Joe would actually get to keep. The red portion is what Joe would pay in payroll and income taxes, and blue and red together represent Joe’s gross salary. The orange portion is what the employer has to pay in payroll taxes on top of Joe’s gross salary.

This data was calculated with the aid of this calculator, using basic deductions. These numbers therefore don’t take into account additional credits or subsidies that Joe or his employer might be entitled to.

Table

Province Total employer cost Net employee salary % to government
British Columbia $53,478 $38,199 29%
Alberta $53,478 $38,148 29%
Saskatchewan $53,478 $37,436 30%
New Brunswick $53,478 $37,325 30%
Newfoundland $53,478 $37,311 30%
Manitoba $53,478 $36,608 32%
Ontario $54,453 $37,565 31%
Prince Edward Island $53,478 $36,548 32%
Nova Scotia $53,478 $36,476 32%
Québec $54,993 $35,955 35%

Here’s another way of looking at this:

Keeping in mind that Joe’s gross salary is $50,000, in British Columbia, a company has to pay a total of $53,478 so that Joe can receive $38,199. He takes home 71% of what the company pays, and the other 29% goes to the government.

In Québec, a company has to pay a total of $54,993 so that Joe can receive $35,955. Assuming that Joe can pick up some French and work in Québec, he would take home 65% of the total pay, and the other 35% would go to the government. If you add in 15% sales taxes, gasoline taxes, licensing fees, etc… it’s not too hard to see how Joe might end up paying over half of his total earnings to the government, even with a typical middle-class salary.

What goes into these taxes? Let’s look at the details:

Employer payroll taxes

Employer payroll taxes are extra payments that any future employer is going to have to pay Joe; these add on top of Joe’s gross salary and increase the total cost of keeping him employed.

No matter which province Joe lives in, he’ll probably pay at least the following:

CPP
The Canada Pension Plan, Canada’s pension program.
EI
The Employment Insurance program. This is optional for self-employed workers, including those who own their own corporation.

He would also have to pay additional taxes if he lived in certain provinces:

Ontario
Employer Health Tax
This is a special health care contribution made by the employer.
Québec
QPP
In Québec, the pension plan is administered by the Québec government and known as the QPP. Québec companies pay this instead of the CPP.
QPIP
The Québec Parental Insurance Plan.
Health Services Fund
This is a special Québec-only payroll tax used to fund Québec’s health care system.

Employee payroll taxes

Not only does Joe’s employer have to pay, but Joe also has to pay. Here’s what he pays:

Federal Tax
The income tax component that goes to the federal government.
Provincial Tax
The income tax component that goes to the provincial government.
CPP
Same as the employer CPP.
EI
Same as the employer EI.

Again, you also have specific taxes for the provinces:

British Columbia
BC Health Premium
Residents of BC need to pay into their health care system as a separate contribution. While not strictly a payroll deduction, I’m including it here for fairness in comparing with Ontario, Québec, and the other provinces.
Ontario
Ontario Health Premium
This is Ontario’s health care contribution, and is deducted from the employee’s paycheck.
Québec
QPP
Same as the employer QPP.
QPIP
Same as the employer QPIP.

How about my friends down south?

How does the payroll situation look like south of the border? Up here in Canada, payroll taxes can impose a significant burden, and many employees are not aware of the extra burden that their employer has to pay. On the other hand, some of these taxes get replaced by income tax as income continues to rise. For example, CPP ends at around $50,000 of income.

Someone making $100,000 in British Columbia would receive 70% of what the company pays, which is very close to the 71% they receive at $50,000. Someone making $100,000 in Québec would receive 61%, with the other 39% going to government, so taxes in Québec rise a little more steeply. Add in sales taxes, gasoline taxes… you get the picture. ;)

What also surprised me is how much someone making a low salary will still pay, that is, if they don’t have deductions for having a kid or things like that. Someone making $30,000 will still need to hand over roughly 25% to 30% over to the various government programs (some of that by the employer), and what they have left over will still be subject to sales tax. No wonder it can feel so hard to get ahead when one’s income is low.

However, those at this level will arguably receive the same or more of the benefits when it does come time to retire and take advantage of the other programs provided for by these deductions, so it’s fair that they do pay some of the costs (whether the programs themselves are fair is another debate). Lower income Canadians also receive sales tax rebates, which helps with the regressive nature of these programs. I loved getting those cheques when I was still in university. ;)

Seems like there’s only a couple of sure things in life… death, and taxes!

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About

Kevin has left the office, and he is currently fighting the rat race by working on his own business. He enjoys exploring unvisited places around the world and gaining new experiences. He believes that by properly managing our energy and time, we can learn to invest our lives wisely.

35 Comments Kevin on Jun 18th 2012

35 Responses to “How Much Do You Pay in Payroll and Income Taxes? Here’s an Overview of Canada’s Income and Payroll Taxes for 2012, by Province”

  1. Those are some high tax rates Kevin! Hope you have some good expenses for deductions!

    • Kevin says:

      The good thing is that the corporate tax regime is a lot more sane! Canada wants to encourage small businesses, so we have a low small-business tax rate to help out with that. Also, stuff I would have paid for with after-tax dollars, like a laptop, I can now pay for with pre-tax dollars since they are crucial to running the business.

      The personal tax situation… meh, it’s not too fun, but it seems California’s in the same boat. Maybe your sales tax is a little less insane though? Ours goes up to 15%! Even with that, you’re still in California, and it’s hard for me to counter that. ;)

      • I agree that higher personal tax rates are worth it to keep taxes competitive for small businesses. We need to do everything we can to provide incentive for people to take risks. I’m the perfect example. To be brutally honest, I get paid too much as a teacher (Manitoba). At the age of 32, if I continue to work full time, I would earn the equivalent of 82K in today’s dollars (anyone want to bet that our union won’t get AT LEAST inflation-level raises?). If I get my master’s degree which I am on course to do in the next few years, that pumps to 86-87K level. When you combine it with a great overall benefits package I have a massive incentive to stay a teacher. The premise is the same with other government jobs right now. Even though I work in the public sector, I am the first to admit the incentives are not balanced right now.

        • Kevin says:

          In today’s dollars, so I’m assuming at least mid-70s, plus time off in the summer, plus benefits, plus a good pension… that is just insane.

          Instead of cutting their salaries, though, I’d rather see people be given more choice of how to use their tax dollars. A high salary is fine if a teacher is good and parents agree. If a local school is doing rather poorly, it seems rather unfair for people to be forced to subsidize that. In the end it’s supposed to be about the students, right? ;)

  2. How surprising with Quebec, the worst part is that we probably have the highest debt per capita among the provinces! One wonders where all the tax money goes!

    • Kevin says:

      No need to wonder — look at the size of the bureaucracies and the size of the crowds on the street. ;) It goes hand in hand.

  3. CF says:

    I always thought it’d be cool if you could designate 1% of the taxes that the government collects from you as going towards a cause of your choice. Like a checkbox on your tax return – do you want your 1% to go towards Education, Heathcare, etc. etc. So the other 99% the government allocates as they see fit, and you get to allocate that last 1% that you pay.

    Seems silly, I know, but it’d make me feel more like my taxes were going towards things that were important to me!

    • Kevin says:

      I would like to see just where the money goes to begin with. ;)

      In the long run I’d also like to see more power in the hands of the people when it comes to education, the family, etc, instead of this all being centralized in the hands of the state and then subject to crony capitalism, petty bureaucracy, etc… It really has nothing to do with left wing or right wing, but free up people from the weight of bureaucracy and they can do wonders.

  4. Shilpan says:

    I can see that Canada has higher taxes than America. It’s insane to pay half of your salary to the government. I think national sales tax( fair tax ) is the answer to achieve real financial growth for any nation.

    • Kevin says:

      I actually did a calculation for California and the numbers came out very similar to the mid-range for Canada! The difference is that in California one would need private health insurance if I understand things correctly, so it’s actually more expensive. On the other hand sales taxes are probably lower there?

      Texas on the other hand is much less punitive, and housing prices are much better there too eh? I recently read a story about a Quebec couple that moved to Texas to practice medicine over there.

      Canadian personal taxes do suck, but I think one major advantage is our low corporate tax regime. In most provinces you will pay about 15% on profits less than $500,000. Yes, large American companies can get away with paying low taxes, too, but what about small businesses? What’s the tax regime like for them? The official schedule seems a lot heavier than what we have here in Canada. I would love to hear your thoughts on this.

      • Shilpan says:

        Kevin, top marginal rate for the small business owners in America is obviously higher than Canada. It is 33% for an individual with S-corp income of over $200,000 and a married couple with income over $250,000.

        I agree with you that small businesses are the backbones of the American economy, so government should try to lower the tax rate rather to boost the economy.

        • Kevin says:

          That’s a flow-through corp? I don’t believe we have those here in Canada, other than for REITs. 33% doesn’t seem so bad for $200,000 assuming that’s your all-in expense and that’s what you receive as personal compensation.

          Here, the corporate rate will be up to 19% in Quebec and as low as 11% (iirc) in some of the provinces up to $500,000 in income. That’s money you can’t take out if you don’t want to eat a much higher tax rate of 40%ish, but at least you can reinvest it in the company without losing too much to taxes.

  5. And here I was complaining about the 21.5% that I have to pay to the Barbados government. There is also a 17.5% VAT on items (e.g. food, some services, stationery, cars etc.)….

    • Kevin says:

      And there’s no capital gains tax there either from what I’ve read! You live in Barbados? Nice… :)

      I think there aren’t too many areas of the world that have both low taxes and a high standard of living, but those out out there all seem to be small countries or islands, like some of the Caribbean islands and Hong Kong & Singapore.

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  8. Wow, great breakdown! Being self employed in Texas has its pros and cons when it comes to taxes. We don’t have state taxes, but since we cover the employer’s part of Social Security, we do end up in the 35-43% category. After deductions though, we really are usually contributing 20-27% depending on the year.

    • Kevin says:

      20 – 27% isn’t too horrible. I find it scary that even middle-class Canadians are near 50% once you consider the sales taxes, though a lot do get a break if they are married with kids, or get to defer their taxes if they contribute to their registered retirement savings plan.

      I estimate that if I get a similar salary as I was getting at work, I will have a lower burden since some of that will stay in the company for re-investment and some expenses will be covered with pre-tax dollars. It won’t be a huge difference but it should hopefully at least make up for the fact that I will have to cover employer payroll costs.

  9. Looks like its a lot of taxes. Why don’t you switch to any other country?

    • Kevin says:

      Where would I go? Europe, with their debt problems? The US, with their higher corporate tax rates? I’m not rich enough to go to a place like Singapore where the taxes are lower but the living standard is still quite high. ;)

      It still makes more sense for me to stay where I am, but I don’t expect that to remain true forever. The one place in the US I would consider at the moment is around Silicon Valley.

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  11. I know it is my obligation to pay my taxes. But I cannot imagine how I can live in a country where almost half of my salary goes to the government and taxes! Maybe 20%-25% is good enough?

    • Kevin says:

      I think 20% – 25% would be so much better, and much more manageable! I believe in the long-run, taxation rates will reduce to this level or lower because of changes that will occur to the monetary system and as technology enables an increasing amount of competition and makes it easier to work from wherever you live.

      That said, honestly the U.S. doesn’t seem any better in this regard to me, because taxes are still high, medicine is more expensive (not to pass a judgement saying that Canada’s system is better, because we have deep flaws, too, but nonetheless, it’s covered in our taxes), there are a lot of insane regulations that are anti-small business, and worst of all, the entire economy is levered on massive amounts of debt. Canada has a debt problem, too, but we’re a little more careful because we faced an ugly situation in the 90s and it wasn’t too pleasant.

      Some areas are better than others, like perhaps Texas with its lower taxation and freer economy, and perhaps Silicon Valley is just so productive and innovative that it makes up for all of this dead weight. I don’t know. Brain drain used to be a big problem for Canada, but right now I’m not too tempted enough to cross the border given the current political and economic climate down south.

  12. I always smile when I see the poorer less affluent provinces paying the highest tax rates. Doesn’t make a lot of sense. You would think it would be the reverse. All I know is that I am really happy when my CPP and EI payments finish and I get a bigger paycheck I can use for savings etc.

    • Kevin says:

      It goes hand in hand. Excessive taxation destroys the incentive to work harder and accumulate capital. Why would you work your butt off when you know others are going to enjoy it, instead of you? Even if you love paying taxes, I doubt anyone loves everything that their taxes go to support, including government waste and fraud, construction fraud, corporate fraud, public-private fraud, public sector unions making significantly more than the private sector, etc….

      A balance needs to be restored where the government works for the citizens, not for themselves and the citizen gets treated like a cow for the milking.

  13. Those numbers seem very similar to here in the UK as well. I actually disagree with the amount of taxation going on. I feel as if it does indeed discourage work as people move into higher tax brackets. I think there should be big reduction in income taxes and more of a focus of governments on consumption taxes such as VAT. That way people can decide how much tax they want to pay based on their spending. Furthermore the richer would end up paying more taxes as they would buy more expensive goods…but what do I know! :D

    • Kevin says:

      Hi MMR,

      Where do you think the UK economy is headed long-term? There seems to be a heck of a lot of debt at the government + private levels.

      I actually read some interesting stuff about consumption taxes which helped me to realize that they are actually more like an income tax in a sense. When you spend money on goods, that expense is someone else’s income. If you have to pay a sales tax, the money has to come from somewhere: it comes from you. It doesn’t just come out of nowhere with your purchasing power remaining the same. You now have less demand for goods and services, which means that producers will earn less income from you. This ends up being a tax on production, and a tax on the income of producers, so it still has the negative consequences of reducing capital investment and the growth of the economy. No free lunch.

      I guess either way you go about it, a tax hurts the economy beyond certain levels. Even if you can reduce overall taxation, if you have an out of control government, you’ll eventually feel it in terms of inflation and reduced purchasing power. The real challenge is how to bring back sustainability to the budgets?

      • I personally believe it is time for radical change. A 10% cut in income taxes should do it! However this is probably not going to happen. Instead the government seems fixed on reducing spending (which I agree with) but not reducing tax. In my opinion this sends mixed messages. On the one hand the Government says they are trying to reduce the debt burden and instead it was announced today that it has increased. If they really wanted to do this they’d completely slash spending and raise taxes. But this namby pamby tinkering here and there is useless. The government needs to decide one way or the other.

        In my opinion we need to roll back the welfare state. It is an ever growing monster. The problem with it is that it can only ever grow. You rarely hear of a politician saying “we’re going to cut this and that” because it’s not popular. Instead you always hear “we’re going to do this and add that” but noone ever gets rid of anything. It’s out of control. The UK’s in for a tough time.

        Whilst I’m ranting I might as well go on. The UK government needs to stop funding the other growing elephant in the room – Europe. We really aren’t as integrated with Europe as other European countries. We need to look to the rest of the world to export to (e.g. the Commonwealth and the BRICS). But for some ridiculous reason we feel the need to keep flogging a long-dead horse.

        • Kevin says:

          Thanks for sharing your thoughts, MMR! I found this pretty interesting.

          I’m not sure that the debt will ever be reduced or paid off. My own personal approach is to vote with my dollars and buy physical bullion (not paper gold). It’s too easy for politicians to inflate if they can’t tax or borrow, so I refuse to endorse this and I take at least a part of my savings out of the system. Canada itself might be better off but there is no island of safety in a globally interconnected world.

          It’s kind of painful that the UK sold gold at the bottom, but it seems like they now want to get back in.

          • Sadly it’s not the best time: Buying at near the top after you’ve sold at the bottom. Not exactly a great investing example!

          • Kevin says:

            Haha, nope! However, this might sound a bit insane, but I personally don’t really care what the current price of gold is, because I don’t look at it the same way I look at a stock. It’s not an investment; it’s a currency and a store of value. Do you look at the exchange rate of the pound against other currencies every day when you save in pounds? Probably not. If you’re saving those pounds as a short-term buffer, you’re probably more concerned with what the pounds can do for you in terms of local goods & services at the point in time you’d be looking to sell.

            I’m acquiring a bit here and there as a store of value, and I believe that there is a revaluation that is currently underway that is going to inflict pain on the real exchange value of debt-denominated instruments. It’s not so much that I think that gold is going to go up with all else remaining equal; I don’t believe that at all. Rather, a lot of other things are going to go down. There is no bigger bubble than that of sovereign debt!

            Things are already set in motion. Many central banks and countries around the world seem to agree, and what I find more interesting is that private ownership is increasing in places like China. They could all be retarded, but I believe that they can see what’s coming and are preparing for it, especially China who has a lot of skin in this game. I invite you to read http://fofoa.blogspot.ca/2012/04/peak-exorbitant-privilege.html, it’s quite interesting. Everyone has to make up their own mind, but for me, 10% to 20% seems like a good margin.

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