Average tax rate and marginal tax rate

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.

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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

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 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 2021 are:

• 15% on the first $49,020

• 20.50% on income over $49,020 up to $98,040

• 26% on income over $98,040 up to $151,978

• 29% on income over $151,978 up to $216,511

• 33% on income over $216,511

Examples

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 $1000 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%, pays 20% on whatever part of 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

The federal marginal tax rates are the same for all Canadians, though provincial marginal tax rates differ—how much tax you pay will depend on the province you live in.

For example, the highest marginal tax rate in New Brunswick is lower than the highest marginal tax rate in Quebec.

Let’s say you earn more than $216,511 in Saskatchewan. Your marginal tax rate (federal and provincial combined) will be 47.50%. If you make more than $216,511 in Nova Scotia, however, the marginal tax will be 54%. So for every dollar that you earn over $216,522 in Saskatchewan, you’ll pay 47.5 cents in tax and take home 52.5 cents. For every dollar you earn in Nova Scotia over $216,522, you’ll pay 54 cents in taxes and take home 46 cents.

How marginal taxes can be lowered

To lower your taxes you can adopt the following strategies:

Tax deductions: Tax deductions decrease your total taxable income and consequently the amount of tax you pay. Deductions can sometimes kick you down a tax bracket so you no longer have to pay higher marginal taxes on additional dollars of income.

Increase RRSP contributions: Higher contributions to a Registered Retirement Savings Plan (RRSP) also lowers your taxable income and reduces 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 tax credits that Canadian individuals and families can receive to lower their taxes and take home a higher net income.

Frequently Asked Questions

Marginal tax rate is the tax rate at which you pay taxes on every additional dollar of income.

Marginal tax rates (federal and provincial or territorial) can be found on the Canada Revenue Agency (CRA) website. You can calculate your taxes by applying the tax rate to portions of your income.

For instance: The Manitoba marginal tax rates (federal and provincial combined) for the year 2021 is: 10.8% on the first $33,723 of your taxable income, 12.75% on taxable income above $33,723 but not more than $72,885, 17.4% on the taxable income above $72,885.

So, if you earn $50,000 per year in Manitoba, your federal and provincial tax will be approximately $13,271.

The marginal tax rates charged by the federal government for the tax year 2021 are 15% for the first $49,020 of taxable income. 20.50% on the taxable income over $49,020 up to $98,040, 26% on the taxable income over $98,040 up to $151,978. 29% on taxable income over $151,978 up to $216,511. 33% on taxable income over $216,511.

The average tax rate is the percentage of the total taxes you pay on all income. For instance, if you pay a total of $2,000 in taxes and your taxable income is $20,000, your average tax rate is 10%. The marginal tax rate is the tax rate that applies to every additional dollar of your income.

The average tax rate is usually lower than the marginal tax rate because the average tax rate shows the total share of tax on an individual’s taxable income while the marginal tax rate only shows the tax rate imposed on additional dollars of income.

The marginal tax rate is applied to each additional dollar of income. It is important to keep in mind that the marginal tax rate does not apply to the entire taxable income. It only applies to a portion of your income above a certain threshold.

The highest marginal tax rate Canada is 33%, which applies to any income over $216,511—and only that income over $216,511.

The highest tax rate (federal and provincial combined) is 54% on income above $216,511 in Nova Scotia.

Last Updated May 3, 2022

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