Canada has a progressive tax system, meaning that tax rates increase as income increases. The marginal tax rate is the additional tax rate at which every additional dollar of income is taxed in a progressive system. The average tax rate shows the percentage of the total tax you pay on your total taxable income.
Let’s take a deeper look at how both work:
Average tax rate
The average tax rate shows the percentage of the total tax you pay on your total taxable income. It is an average of all the taxes that apply to different types of income earned during a tax year. If you paid withholding tax, capital gains tax, and dividend tax on your income in a tax year, all of them factor into your total tax.
Knowing your average tax rate helps you understand your total tax burden and gives you a clear idea of how much tax was actually deducted from your income.
Marginal tax rates
The marginal tax rate is the tax rate at which you pay taxes on the next dollar of income earned. In Canada, the income of taxpayers is divided among several federal and provincial or territorial tax brackets. The level of income that falls in each tax bracket is taxed at the tax rate of that bracket.
Your marginal tax rate depends on the highest tax bracket into which a portion of your income falls. The marginal tax rate increases as your income increases, so you pay higher taxes on the level of income that falls into a higher tax bracket. So, your marginal tax rate is the tax rate at which you’ll pay taxes on the last dollar of your income and the immediate additional dollar of income.
A 20% marginal tax rate means that on the next dollar of income earned, you will pay 20 cents to the dollar in taxes.
There are federal, provincial, and territorial income tax rates for four main types of personal income: income from capital gains, income from eligible dividends, income from ineligible dividends, and employment or self-employment income.
The federal income tax rates for Canadian tax brackets in 2024 are:
15% on the first $55,867 plus
20.5% on income over $55,867 up to $111,733 plus
26% on income over $111,733 up to $173,205 plus
29% on income over $173,205 up to $246,752 plus
33% on income over $246,752
Examples of Average and Marginal Tax Rates
Average tax rate: The average tax rate can be calculated by dividing the total tax paid by the total taxable income. For instance, if Jimmy paid $1,000 in taxes and his total income was $20,000, his average tax rate is $1,000/$20,000 = 5%.
Marginal tax rate: The marginal tax rate is the additional tax rate at which every additional dollar of income is taxed. For instance, if Jimmy’s marginal tax rate is 20%, he pays 20% on whatever part of his income is above a certain threshold. If the tax rate is 10% on the first $10,000 and 20% on the next $10,000, and Jimmy makes $20,000, he pays higher taxes on income above $10,000. Jimmy doesn’t pay 20% tax on the entire income, only the portion of income above $10,000.
How marginal tax rates vary by province/territory
The federal marginal tax rates are the same for all Canadians, though provincial/territorial marginal tax rates differ — how much tax you pay will depend on the province/territory you live in.
For example, the highest marginal tax rate in New Brunswick is lower than the highest marginal tax rate in Québec.
How marginal taxes can be lowered
To lower your taxes, there are many strategies you can adopt:
Tax deductions: Tax deductions decrease your total taxable income and, consequently, the amount of tax you pay. Deductions can also sometimes kick you down a tax bracket so you wouldn’t have to pay higher marginal taxes on additional dollars of income.
Increase RRSP contributions: Higher contributions to a Registered Retirement Savings Plan (RRSP) also lower your taxable income and reduce the effect of high marginal tax rates.
Take advantage of eligible tax credits: Tax credits reduce your tax liability directly. For instance, if you owe $5,000 in taxes and receive a $2,000 tax credit, your tax liability will be reduced to $3,000. There are several federal and provincial/territorial tax credits that Canadian individuals and families can receive to lower their taxes and take home a higher net income.
