What Is the Marginal Tax Rate and How Does It Work in Canada?

What is the marginal tax rate in Canada?

Your marginal tax rate is the amount of tax you will pay on the dollars earned in the highest range of income, or tax bracket, you reach. The progressive tax system is a tiered system that applies a higher tax rate on higher ranges of income. As you earn more, you pay more tax per dollar. 

Knowing what your marginal tax rate is can help you understand:

• How much tax you may owe on additional income (so you can set the money aside in advance)
• How much you would like to allocate toward your investments, such as the Registered Retirement Savings Plan (RRSP)
• Saving for other financial goals (e.g., down payment on a car or home)

How does the marginal tax rate work in Canada?

There are two tax bracket systems in Canada: federal and provincial/territorial. Each province and territory has its own tax brackets; so the total amount of taxes you’ll pay depends on how much income you earn, where you live, and the combined marginal tax rate.

Federal tax brackets

No matter if you live in a big city or small town in Canada, the 2023 federal tax rates and income thresholds will apply to everyone. Here are the rates for 2023:

Provincial and territorial tax brackets

The Canadian government collects these taxes and returns them to the provincial and territorial jurisdictions through different programs (with the exception of Quebec, which collects and manages its own income taxes).

To give you an idea of the tax brackets across the country, we’ve listed a few examples.

Here are the marginal tax rates in British Columbia:

Here are the marginal tax rates in Ontario:

Here are the marginal tax rates in Quebec:

For details on the tax brackets for other provinces and territories, visit the Canada Revenue Agency (CRA) website.

How do you calculate the marginal tax rate?

To show how you can calculate your marginal tax rate, let’s meet our awesome friend Maja! Maja is a hard-working business analyst and lives in Ontario. She has contributed to her RRSP to reduce her taxable income (a smart strategy!). After factoring in tax deductions, she has a taxable income of $63,500.

Step 1: Calculate your federal income tax.

The initial $53,359 is taxed at 15%, which equals $8,003.85 ($53,359 x 0.15 = $8,003.85).

In Maja’s case, her balance of $10,141 ($63,500 – $53,359) will be taxed at the rate of 20.5% (the next income bracket), which comes to $2,078.90. Her total federal income tax owing is $8,003.85 + $2,078.90 = $10,082.75.

Step 2:  Calculate your provincial income tax.

For Maja, the initial $49,231 is taxed at 5.05% (since she lives in Ontario), which equals $2,486.16 ($49,231 x 0.0505 = $2,486.16).

She has a balance of $14,269 ($63,500 – $49,231) that will be taxed at the rate of 9.15% (the next income bracket), which comes to $1,305.61 ($14,269 x 0.0915 = $1,305.61). Her total provincial income tax owing is $2,486.16 + $1,305.61 = $3,791.77.

Step 3: Add up your federal and provincial taxes owing.

Lastly, all Maja has to do is to add up her federal and provincial taxes owing ($10,082.75 + $3,791.77) to get her total tax bill of $13,874.52. (Don’t worry if this figure seems a bit high. You can reduce the amount of taxes you owe by taking advantage of tax credits).

What is the difference between the average tax rate and the marginal tax rate?

The average tax rate is your overall taxes payable divided by your total income. It tells you your actual tax burden and can be calculated after you know what you fully owe in taxes.

Using the example above, Maja owes $13,874.52 based on her taxable income of $63,500. Therefore, her average tax rate is 22.0% ($13,874.52/$63,500).

Meanwhile, Maja’s federal marginal tax rate is 20.5% and her provincial marginal tax rate is 9.15%. This is because the last dollars she earned fall into the second tax bracket for both tax systems. 

Comparing your average tax rate versus your marginal tax rate is a quick and easy exercise to do. It will give you a full picture of how much you’re actually paying in taxes compared to your overall income and where you land in the marginal tax system.

Use tools to calculate your marginal tax rate

Hopefully, this guide has been helpful in providing you with the information necessary to calculate the taxes you’ll pay. If crunching the numbers isn’t your thing (it’s OK, we won’t tell!), you can use our handy Income Tax Calculator, which will do the math for you.