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.
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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 2020 taxable income is $50,000. You’ll pay:
- 15% on the amount up to $48,535, or $7,280.25
- 20.5% on the amount between $48,535 to $97,069, or $300.33
Your total federal tax payable is therefore $7,580.58.
Of course, you’ll likely apply deductions to the initial $50,000 and then tax credits to the $7,580.58, 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 15.16% ($7,580.58 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 2020 tax year:
As explained above, these federal amounts are adjusted each tax year for inflation and other factors.
|2020 Federal income tax brackets||2020 Federal income tax rates|
|$48,535 or less||15%|
|$48,535 to $97,069||20.5%|
|$97,069 to $150,473||26%|
|$150,473 to $214,368||29%|
|More than $214,368||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.
2020 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 $37,929 of taxable income, +
- 14.5% on the next $37,929 ($37,929 to $75,858) +
- 15.8% on the next $59,574 ($75,858 to $135,432) +
- 17.3% on the next $54,172 ($135,432 to $189,604) +
- 18.3% on the amount over $189,604
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
- 9.68% on the first $43,401 of taxable income, +
- 14.82% on the next $43,402 ($43,401 to $86,803) +
- 16.52% on the next $54,319 ($86,803 to $141,122) +
- 17.84% on the next $19,654 ($141,122 to $160,776) +
- 20.3% on the amount over $160,776
Quebec (via Revenu Québec):
- 15%: $44,545 or less
- 20%: More than $44,545 but not more than $89,080
- 24%: More than $89,080 but not more than $108,390
- 25.75%: More than $108,390
- 5.05% on the first $44,740 of taxable income, +
- 9.15% on the next $44,742 ($44,740 to $89,482) +
- 11.16% on the next $60,518 ($89,482 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 $33,389 of taxable income, +
- 12.75% on the next $38,775 ($33,389 to $72,164) +
- 17.4% on the amount over $72,164
- 10.5% on the first $45,225 of taxable income, +
- 12.5% on the next $83,989 ($45,225 to $129,214) +
- 14.5% on the amount over $129,214
- 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 $41,725 of taxable income, +
- 7.7% on the next $41,726 ($41,725 to $83,451) +
- 10.5% on the next $12,361 ($83,451 to $95,812) +
- 12.29% on the next $20,532 ($95,812 to $116,344) +
- 14.7% on the next $41,404 ($116,344 to $157,748) +
- 16.8% on the amount over $157,748
- 6.4% on the first $48,535 of taxable income, +
- 9% on the next $48,534 ($48,535 to $97,069) +
- 10.9% on the next $53,404 ($97,069 to $150,473) +
- 12.8% on the next $349,527 ($150,473 to $500,000) +
- 15% on the amount over $500,000
- 5.9% on the first $43,957 of taxable income, +
- 8.6% on the next $43,959 ($43,957 to $87,916) +
- 12.2% on the next $55,016 ($87,916 to $142,932) +
- 14.05% on the amount over $142,932
- 4% on the first $46,277 of taxable income, +
- 7% on the next $46,278 ($46,277 to $92,555) +
- 9% on the next $57,918 ($92,555 to $150,473) +
- 11.5% on the amount over $150,473