Canada has a progressive tax system, meaning tax rates rise as your income rises. The marginal tax rate is the tax you pay on the next dollar of income you earn. The average tax rate, on the other hand, shows the percentage of total tax you pay on your total taxable income.
Understanding the difference between these two rates can help you estimate the tax impact of decisions such as Registered Retirement Savings Plan (RRSP) contributions or taking on overtime. Let's take a deeper look at how both work.
Marginal tax rates
In Canada, income is divided among federal and provincial or territorial tax brackets, with each bracket taxed at a different rate.
Your marginal tax rate depends on the highest tax bracket your income reaches. As your income grows, a larger share may be taxed at higher rates.
Here's what that means in practice:
Current dollar: The tax rate on the last dollar of income you earn this year.
Next dollar: The tax rate you'll pay on any additional income you earn.
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 2026 are:
2026 Federal income tax brackets | 2026 Federal income tax rates |
|---|---|
| $58,523 or less | 14% |
| over $58,523 to $117,045 | 20.5% |
| over $117,045 to $181,440 | 26% |
| over $181,440 to $258,482 $ | 29% |
| More than $258,482 | 33% |
How tax brackets work in Canada
Canada uses a progressive tax system, which works like filling up a series of buckets. Each bucket represents a tax bracket.
As you earn income, you fill up the first bucket at the lowest rate. Once that bucket is full, additional money spills over into the next bucket at a slightly higher rate.
A common misconception is that moving into a higher bracket threshold means all your income is taxed at that higher rate. That's not how it works.
Only the money that falls into the higher bracket is taxed at the higher rate. The rest of your income is still taxed at the lower rates. In the tax-bracket system itself, a raise doesn't mean all your income is taxed at a higher rate—though other income-tested benefits or credits can affect your overall take-home amount.
Federal income tax brackets
The federal government sets income tax brackets that apply to all Canadians, regardless of where they live. These brackets are adjusted annually to account for inflation, which helps prevent taxpayers from being pushed into higher brackets simply because the cost of living has gone up.
Your federal tax rate is applied to your taxable income first. After that, your provincial or territorial tax rate is applied. When you combine the two, you get your total marginal tax rate.
How marginal tax rates vary by province or territory
The federal marginal tax rates are the same for all Canadians, though provincial and territorial marginal tax rates differ — how much tax you pay will depend on the province or territory you live in.
For example, the higher marginal tax rate in New Brunswick can be lower than other marginal tax rates in provinces, like say, Québec. This means two people earning the exact same income could have noticeably different tax bills depending on where they reside.
How to calculate your marginal tax rate
Calculating your marginal tax rate is relatively straightforward once you know your total taxable income. First, determine your taxable income by taking your total income and subtracting any eligible deductions, like RRSP contributions.
Once you have your taxable income:
Find your federal tax bracket based on that income.
Find your provincial or territorial tax bracket using the same income. (You can use our tax calculator to speed this up.)
Add the two rates to get your combined marginal tax rate.
This combined percentage tells you how much tax you'll pay on your next dollar of income.
Average tax rate
The average tax rate shows the percentage of total tax you pay on your total taxable income. It accounts for all the taxes that apply to different types of income earned during a tax year, including withholding tax, capital gains tax, and dividend tax.
Knowing your average tax rate helps you understand your total tax burden. Your average tax rate will always be lower than your marginal tax rate because not all of your income is taxed at your highest bracket.
Examples of average and marginal tax rates
Average tax rate example: If Jimmy paid $1,000 in taxes on $20,000 of income, his average tax rate is 5% - $1,000 ÷ $20,000 = 5%.
Marginal tax rate example: If Jimmy's marginal tax rate is 20%, he might pay a total of $3,000 in taxes on $20,000 of income:
10% on the first $10,000 of income - $1,000
20% on the next $10,000 of income - $2,000
He doesn't pay 20% on his entire $20,000 — only on the portion above $10,000.
How to lower your marginal tax rate
To lower your taxes, there are several strategies you can adopt:
Tax deductions: Reduce your taxable income and, as a result, the tax you owe. Deductions can sometimes move you down a tax bracket, reducing your marginal tax rate on additional income.
RRSP contributions: Contributing to a Registered Retirement Savings Plan (RRSP) can lower your taxable income and reduce the impact of higher marginal tax rates.
Tax credits: Reduce the amount of total tax owing directly. For instance, if you owe $5,000 in taxes and receive a $2,000 tax credit, your tax liability drops to $3,000.
