How to Calculate Your Effective Tax Rate

Although this guide was written with Canadian taxpayers in mind, the concepts below are applicable to taxpayers in other countries as well.

What do you mean by “effective tax rate”?

As far as how we apply the calculation below, your effective tax rate is the average tax you pay on every dollar of taxable income you earn.

For example, if you earn $100,000 of taxable income and pay $22,000 in both provincial and federal taxes, then your effective tax rate is (22,000 / 100,000) 0.22 or 22%. That means, for every $1.00 of taxable income earned, the government gets 22 cents.

Why would I want to know my effective tax rate?

Here are a few reasons why you might want to know your effective tax rate:

  • it’s an easy metric to calculate and compare year-over-year;
  • you might be interested to know the per cent of effective tax you pay versus the marginal tax bracket you end up in; and,
  • it can provide you with an estimate of taxes payable for the current, or for a future, tax year.

Do you have to use “taxable income” or can you use other measures of income instead?

If you want your true effective tax rate, then taxable income is what you need.

However, if you’re trying to estimate current or future taxes and don’t know the applicable taxable income amount, you can use whatever income number you have on hand. Just understand that the result of the calculation won’t be your effective tax rate, it’ll be an estimate of future taxes based on your historical tax rate and your available measure of income.

Where do I get the numbers needed for the calculation?

The best place to get the numbers is either from your Income Tax and Benefit Return (“tax return”), or your Notice of (Re)Assessment (“NOA”). That being said, if you have an online CRA My Account, the information you filed on your tax returns, and the corresponding NOA’s, are available there as well.

On both your tax return and NOA, taxable income is found on Line 26000 (previously Line 260). This line may be found on page 5 of your tax return (previously page 3) or page 2 of your NOA.

You will also need your Line 43500 (previously Line 435) total payable amount, which for most taxpayers represents their total federal and provincial taxes payable. This line may be found on page 8 of your tax return (previously page 4) or page 2 of your NOA.

Note that Line 435(00) may contain other items including CPP/EI payable on self-employment income and, on rare occasion, social benefit repayments. For most taxpayers, Line 43500 is sufficient for the effective tax rate calculation.

For taxpayers where Line 43500 doesn’t make sense, just add together Lines 42000 and 42800 (previously Lines 420 and 428) and use that amount as the total payable value instead.

How do I calculate my effective tax rate?

Using the example above, if your tax return or NOA shows Line 260(00) taxable income as $100,000 and Line 435(00) total payable of $22,000 then the calculation is as follows:

total payable / taxable income = effective tax rate

22,000 / 100,000 = 0.22 or 22%

Therefore, the effective tax rate is 22%.

How can I use this rate to estimate my current year taxes?

If you know your effective tax rate was 22% last tax year when you earned $100,000 of taxable income, and expect you’ll earn approximately $110,000 of taxable income in the current year, your current year taxes may be estimated as follows:

current year taxable income * effective tax rate = estimated current year taxes

110,000 * 0.22 = 24,200

Therefore, the estimated amount of current year total taxes payable is $24,200. Note that this method of estimation is less reliable when your taxable income changes drastically. This is because when taxable income changes drastically the effective tax rate changes drastically too.

If you don’t know your effective tax rate, then you can estimate current or future taxes using a “tax rate” derived from any other measure of income. For example, if your total income last year was $130,000 and total tax payable was $22,000 your tax rate may be calculated as (22,000 / 130,000) 0.1692 or 16.92%.

This rate could then be used as follows to estimate taxes for the current year where total income is expected to increase to $140,000:

current year total income * tax rate = estimated current year taxes

140,000 * 0.1692 = 23,688

Knowing your estimated current year taxes payable may help you better plan for any impending tax remittance deadline. For example, if you know there’s going to be a shortfall, you may consider asking your employer to withhold more taxes at source or, alternatively, consider making personal tax installments to the CRA.