Tax rate, tax bracket, marginal tax, average tax — there sure is a lot of tax-related terminology floating around, isn’t there? In our previous blog post, we discussed the ins and outs of tax credits and deductions in Canada, and how you can get a bigger tax refund. This time, we’re zooming out a little bit, tackling the differences in marginal tax vs average tax, and just what tax bracket you might fall into in the first place.
This will ultimately help you better understand and plan your finances, and how/when you can claim tax credits or deductions.
What is the average tax rate?
The average tax rate measures your tax burden — i.e. the share of income you pay in taxes. It’s calculated by taking the total tax you paid and dividing it by your total income. Ultimately, it’s an accurate reflection of overall tax liability.
What is the marginal tax rate?
Simply put, your marginal tax rate is the highest tax bracket (and its corresponding rate) that applies to your last dollar of income. As your income goes up, so does your tax rate.
When it comes to financial planning, having a general idea of your marginal tax rate is helpful because it gives you an idea of how much money will be yours to spend, save, and invest. For example, knowing this rate can help you get the most out of RRSP and retirement planning.
(And making financial decisions on your total income instead of your net income is setting yourself up for disappointment!)
What does marginal tax rate mean in Canada?
Canada’s tax system is progressive — i.e. the more you earn, the more tax you pay — so the provincial and federal governments have set tax brackets based on taxable income. These are adjusted each tax year because of inflation and other factors.
How do marginal tax rates work?
Using an example from the CRA, let’s say your taxable income for 2021 will be $50,000. You’ll pay:
- 15% on the amount up to $49,020, or $7,353
- 20.5% on the amount between $49,020 up to $98,040, or $200.90 (i.e. 20.5% of $980)
Your total federal tax payable is therefore $7,553.90.
Of course, you’ll likely apply deductions to the initial $50,000 and then tax credits to the $7,553.90, but the same broad methodology applies.
What is the main difference between the average and marginal tax rates
The primary difference between marginal and average tax rates is that your average tax rate measures your actual tax burden.
To compare marginal tax vs average tax, let’s use the above example of $50,000 in taxable income. The average federal tax rate works out to 15.1% ($7,553.90 divided by $50,000).
Your marginal federal tax rate, however, is 20.5% since that’s the tax bracket where your last dollar of income fell.
Why is my marginal tax rate higher than my average tax rate?
When looking at marginal tax vs average tax, there are three main reasons why the former is higher.
First of all, not all income is taxed. Thanks to tax deductions — like RRSP contributions, work from home expenses, and self-employment expenses — it’s fairly easy to reduce your overall taxable income after you’ve calculated your total income (line 15000 of your tax return).
Secondly, as explained above, your marginal tax rate only applies to your last dollar of income. Under Canada’s tax brackets, only a portion of your income is taxed at a higher rate.
Finally, we have two words: tax credits! While tax deductions work to decrease your taxable income, tax credits reduce how much you’ll end up owing.
Since your marginal tax rate is based on a specific bracket, your marginal tax rate doesn’t actually end up reflecting the total tax payable on your income. Factoring in tax credits and deductions lowers what you owe, and therefore your average tax rate goes down.
Canadian and provincial/territorial tax brackets for the 2021 tax year:
As explained above, these federal amounts are adjusted each tax year for inflation and other factors.
|2021 Federal income tax brackets||2021 Federal income tax rates|
|$49,020 or less||15%|
|$49,020 up to $98,040||20.5%|
|$98,040 up to $151,978||26%|
|$151,978 up to $216,511||29%|
|More than $216,511||33%|
For a manual calculation chart of federal tax on taxable income, click here. This chart reproduces the calculation on page 5 of the Income Tax and Benefit Return.
2021 provincial and territorial tax brackets (per the Canada Revenue Agency)
Specifically, Quebec collects and manages its own income taxes. For all other provinces/territories, the Canadian government collects these specific taxes and returns them to the jurisdictions through various programs.
- 8.7% on the first $38,081 of taxable income, +
- 14.5% on the next $38,081 ($38,081 to $76,161) +
- 15.8% on the next $59,812 ($76,161 to $135,973) +
- 17.3% on the next $54,390 ($135,973 to $190,363) +
- 18.3% on the amount over $190,363
Prince Edward Island:
- 9.8% on the first $31,984 of taxable income, +
- 13.8% on the next $31,985 ($31,984 to $63,969) +
- 16.7% on the amount over $63,969
- 8.79% on the first $29,590 of taxable income, +
- 14.95% on the next $29,590 ($29,590 to $59,180) +
- 16.67% on the next $33,820 ($59,180 to $93,000) +
- 17.5% on the next $57,000 ($93,000 to $150,000) +
- 21% on the amount over $150,000
- 9.40% on the first $43,835 of taxable income, +
- 14.82% on the next $43,836 ($43,835 to $87,671) +
- 16.52% on the next $54,863 ($87,671 to $142,534) +
- 17.84% on the next $19,849 ($142,534 to $162,383) +
- 20.3% on the amount over $162,383
Quebec (via Revenu Québec):
- 15%: $45,105 or less
- 20%: More than $45,105 but not more than $90,200
- 24%: More than $90,200 but not more than $109,755
- 25.75%: More than $109,755
- 5.05% on the first $45,142 of taxable income, +
- 9.15% on the next $45,145 ($45,142 to $90,287) +
- 11.16% on the next $59,713 ($90,287 to $150,000) +
- 12.16% on the next $70,000 ($150,000 to $220,000) +
- 13.16% on the amount over $220,000
- 10.8% on the first $33,723 of taxable income, +
- 12.75% on the next $39,162 ($33,723 to $72,885) +
- 17.4% on the amount over $72,885
- 10.5% on the first $45,677 of taxable income, +
- 12.5% on the next $84,829 ($45,677 to $130,506) +
- 14.5% on the amount over $130,506
- 10% on the first $131,220 of taxable income, +
- 12% on the next $26,244 ($131,220 to $157,464) +
- 13% on the next $52,488 ($157,464 to $209,952) +
- 14% on the next $104,976 ($209,952 to $314,928) +
- 15% on the amount over $314,928
- 5.06% on the first $42,184 of taxable income, +
- 7.7% on the next $42,185 ($42,184 to $84,369) +
- 10.5% on the next $12,497 ($84,369 to $96,866) +
- 12.29% on the next $20,757 ($96,866 to $117,623) +
- 14.7% on the next $41,860 ($117,623 to $159,483) +
- 16.8% on the next $62,937 ($159,483 to $222,420) +
- 20.5% on the amount over $222,420
- 6.4% on the first $49,020 of taxable income, +
- 9% on the next $49,020 ($49,020 to $98,040) +
- 10.9% on the next $53,938 ($98,040 to $151,978) +
- 12.8% on the next $348,022 ($151,978 to $500,000) +
- 15% on the amount over $500,000
- 5.9% on the first $44,396 of taxable income, +
- 8.6% on the next $44,400 ($44,396 to $88,796) +
- 12.2% on the next $55,566 ($88,796 to $144,362) +
- 14.05% on the amount over $144,362
- 4% on the first $46,740 of taxable income, +
- 7% on the next $46,740 ($46,740 to $93,480) +
- 9% on the next $58,498 ($93,480 to $151,978) +
- 11.5% on the amount over $151,978