# Average and Marginal Tax Rates

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

• 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.

The 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.

The marginal tax rates charged by the federal government for the tax year 2024 are:

• 15% for the first \$55,867
• 20.50% 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

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 federal marginal tax rate in Canada is 33%, which applies to any income over \$246,752 — and only that income over \$246,752. Just remember, you will still need to take into consideration the provincial and territorial tax rates, which differ across Canada.

Last Updated June 17, 2024

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