The higher tax-bracket myth

Very often, I hear people complaining about paying more taxes as a result of working overtime, taking a second job or receiving a bonus.

A very common sentence is: “working overtime puts me in a higher-tax bracket, so it may not be worth it”.

there is no such thing as “being in a higher tax-bracket”

People claiming this don’t understand how the Canadian tax system works. I don’t blame them. Taxation is a very boring matter.

That being said, I believe that understanding a few tax basics can help anyone make better financial decisions.

canada has a progressive tax system

Basically, it means that people will pay more taxes as they earn more money….but in a progressive manner or a tiered-manner. Here are the federal tax rates at the time of writing:

• 15% on the first $45,916 of taxable income
• 20.5% up to $91,831 
• 26% to $142,353 
• 29% up to $202,800 
• 33% of taxable income over $202,800

For the sake of simplicity, let’s say an employee earns $ 45 000 gross per year. In refering to the above tax rates, our employee will be taxed at 15%.

Now, let’s say that our employee works overtime during the year, and earns an extra $ 5 000. Their gross income is now $50 000. In refering once again to the above rates, our employee will now pay 20.5%, right? WRONG! 

This is not how a progressive tax system works.

Our employee will actually pay taxes of 15% on $ 45 916 and 20.5% on the remaining $ 4 084.

This is where most people are confused. They think that their entire income will be subject to a higher tax rate, when it is not the case.

you can work overtime

As demonstrated above, working overtime will not result in a massive tax bill. Keep in mind you may be eligible for additional tax credits when filing your return.