Federal Tax Brackets

Definition

Federal personal income tax is charged at marginal rates that climb as taxable income crosses fixed thresholds. Only the portion of income inside each bracket is taxed at that bracket's rate, so the marginal rate on the next dollar earned is not the rate on every dollar. The bracket thresholds are indexed annually to inflation under ITA s.117.1. Provincial brackets and rates stack on top and are calculated separately on the T1.

Key rules

• 2026 federal brackets (verify current-year figures against canada.ca before filing):
  • 15% on the first $57,375 of taxable income
  • 20.5% on the next $57,375 (to $114,750)
  • 26% on the next $63,132 (to $177,882)
  • 29% on the next $75,532 (to $253,414)
  • 33% on taxable income above $253,414
• Non-refundable tax credits (including the Basic Personal Amount) all apply at the 15% rate regardless of the filer's top marginal rate.
• The top federal combined-with-province marginal rate exceeds 50% in most provinces.
• Dividends and capital gains are taxed at personal rates, but adjusted amounts (gross-up for dividends, inclusion rate for capital gains) apply first.

Example

An Alberta resident has taxable income of $120,000 in 2026. Federal tax (before credits) is calculated bracket by bracket.

15%   x  $57,375                        =  $8,606.25
20.5% x  ($114,750 − $57,375 = $57,375) = $11,761.88
26%   x  ($120,000 − $114,750 = $5,250) =  $1,365.00
Federal tax before credits              = $21,733.13

The Basic Personal Amount credit then reduces this by roughly $2,419 (15% of $16,129), and Alberta tax is calculated separately on a parallel schedule.

Common mistakes

• Assuming a raise will be "taxed back" because of a higher marginal rate. Only the income inside the new bracket is taxed at the higher rate.
• Applying the top marginal rate to total income for a rough estimate (overstates tax).
• Forgetting that credits are valued at 15%, so a $1,000 deduction saves more tax than a $1,000 credit for anyone above the bottom bracket.
• Not updating for indexation. Bracket thresholds shift each year and stale numbers produce wrong estimates.

Related concepts

Marginal rates set the backdrop for every planning decision on the T1 return. They interact directly with the Basic Personal Amount and with the distinction between deductions and credits. For owner-managers, the gap between the top personal rate and the corporate rate is what drives the salary versus dividends analysis.