In Canada, different types of income are taxed in different ways depending on the source and nature of the income. Here’s an overview of how the main types of income are taxed:

1. Employment Income

• Taxed as Regular Income: Wages, salaries, bonuses, and other employment-related earnings are taxed at the individual’s marginal tax rate, which depends on the total amount of income earned.
• Deductions: Certain expenses, like union dues, may be deductible to reduce taxable income.

2. Self-Employment Income

• Taxed as Business Income: If you are self-employed or run a business, your income is taxed as business income. You’ll need to report your total revenue and deduct eligible business expenses to determine your taxable income.
• Deductions: Business expenses (e.g., office supplies, vehicle expenses, home office) can be deducted to reduce taxable income.

3. Investment Income

• Interest Income: Interest from savings accounts, bonds, and other financial instruments is fully taxable at your marginal tax rate.
• Dividend Income: Dividends from Canadian companies are eligible for a dividend tax credit, which lowers the effective tax rate on dividend income. The tax rate depends on whether the dividends are “eligible” or “non-eligible.”
• Capital Gains: When you sell investments like stocks, bonds, or real estate (not your primary residence), you pay tax on 50% of the capital gain. For example, if you sell an asset for a $10,000 gain, you would include $5,000 in taxable income. Note that the Federal Government is considering taxing 66.67% of capital gains starting in 2026.

4. Rental Income

• Taxed as Income: If you own rental properties, the income you receive from tenants is taxed as rental income. You must report the income, but you can deduct expenses related to the property (e.g., maintenance, property taxes, mortgage interest).
• Deductions: Eligible expenses can reduce the taxable rental income.

5. Pension Income

• Taxed as Income: Pensions, including Canada Pension Plan (CPP) and Old Age Security (OAS), are generally considered taxable income. If you’re receiving a pension from a company or government, it will be taxed at your marginal tax rate.
• Tax-Deferred Contributions: If you’re withdrawing from a Registered Retirement Savings Plan (RRSP), the income is taxed when withdrawn, but contributions to the RRSP are made pre-tax.

6. Government Benefits

• OAS and CPP: These are taxable at your marginal tax rate, although OAS benefits can be reduced if your income exceeds certain thresholds.
• Other Benefits: Some other government payments, like the GST/HST credit or the Canada Child Benefit, are not taxable.

7. Social Assistance and Unemployment Benefits

• Taxable: Most social assistance or unemployment benefits (e.g., Employment Insurance (EI)) are taxable income. These are included in your total income and taxed according to your tax bracket.

8. Other Types of Income

• Alimony or Support Payments: In general, alimony or spousal support is taxable for the recipient and deductible for the payer if the payments are formalized in a court order or agreement.
• Scholarships and Bursaries: These are usually exempt from taxes if they are received for full-time post-secondary education.

Progressive Tax System

Canada has a progressive tax system, which means the more you earn, the higher the rate of tax you pay. The federal tax rates are graduated (e.g., 15% on the first $57,375 of taxable income for the 2025 tax year), and each province/territory also has its own tax rates.

Additionally, Canada offers various tax credits and deductions that can reduce your overall tax liability. These include the basic personal amount, spousal amounts, and credits for medical expenses, charitable donations, and more.

Here are the tax brackets for BC for 2025.