Canadian Tax Brackets: Marginal Tax vs Average Tax

In Canada, we operate under a marginal tax rate system which simply means the more money we make, the more tax we are privileged to pay. Marginal tax is simply the amount of tax paid on an additional dollar of income. As income rises, so does the tax rate. This is different than a flat tax rate where you pay the same rate of tax no matter what your income level is.

Knowing your marginal tax rate can help you make effective financial decisions. From a planning point of view it is not good enough to just know how much money you make. It is essential to understand how much you keep. Making a dollar doesn't allow you to count on spending that dollar. Knowing your marginal tax rate will tell you how much of that dollar you can utilize toward your lifestyle. If you are planning your finances or retirement, the focus should be on your net income.

Canadian and Provincial Tax Brackets

In Canada we have two layers of income tax – federal and provincial. To illustrate how marginal tax rates work, my example shows tax rates for Alberta residents and encompasses both provincial and federal tax.

For the year 2016, there are many tax brackets:

  • $0 to $11,474 – 0% (this is not really a bracket but the personal exemption level)
  • $11,475 to $18,451 – 15%
  • $18,415 to $45,282 – 25%
  • $45,283 to $90,563 – 30.5%
  • $90,564 to $125,000 – 36%
  • $125,001 to $140,388 – 39%
  • $140,389 to $150,000 – 41%
  • $150,001 to $200,000 – 42%
  • $200,001 to $300,000 – 47%
  • over $300,000 – 48%

If you earn $50,000 in income in 2016, then you would be in the 30.5% marginal tax bracket and you would pay 30.5% of any additional dollar you made to the federal government. If you earn $100,000, then you would be in the 36% marginal tax bracket.

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One of the biggest misconceptions about tax rates is that your entire income will be taxed at your marginal tax rate. Here's an example to show you how it actually works:

The person making $50,000 per year would not pay $15,250 in tax ($50,000 x 30.5%). Instead, his/her tax would be calculated like this:

$11,474 at 0% = $0
($18,541 minus $11,474) at 15% = $1060.05
($45,282 minus $18,541) at 25% = $6685.25
($50,000 minus $45,282) at 30.5% = $1438.99

Total tax = $9,184.29

The marginal tax rate of 30.5% is the amount of tax paid on any additional dollar made up to the next tax bracket. In this example, the average tax is only 18.37% ($9,184.29 divided by $50,000 of total income). Average tax is the percentage of tax paid based on your total gross income and reflects the total tax you are paying. It is the total amount of tax you will pay through all the brackets divided by total income and will mathematically always be lower than the marginal tax rate.

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The tax system varies from province to province. With 10 provinces and 3 territories, you can imagine the complexity of the Canadian tax system. Add in the fact that the rules can change every year because of provincial and federal budgets and you have an ever-changing and complex tax system.

Lastly, paying tax is not such a bad thing because it means you are making more money. You hear people complain about paying tax and the desire to pay not tax. I have a solution . . . make no money and you will pay no tax.

But also know that no matter what tax bracket you are in, you should never ever turn down money. Our tax system works in such a way that the more you make, the more tax you will pay but you will still always win by making more money. You will never lose by making more money.

My advice to people. Learn how the tax system works before you complain. Learn how to use the system to your advantage. Spend more time on tax planning than investment planning and trying to predict the future of the markets. That's time better spent!

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites and Clearpoint Benefit Solutions.

12 Responses to Canadian Tax Brackets: Marginal Tax vs Average Tax

  1. For a while now, I have been wondering why no politician from either party has proposed establishing additional marginal tax rates above the much argued $250k threshold.

  2. Could you explain how the Ontario Surtax and Health premium are added to the marginal tax rate? For example, at $130,000 taxable income, the marginal tax rate is listed as 46.4. I understand that the Federal tax is 29% and the Provincial tax is 11.16 = 40.16. How do you get the other 6.24% to make up 46.4?

  3. There is only one part of the article that is wrong. That first bracket is not taxed @ $0. It is taxed at 15% x basic personal exemption at the minimum. Is this correct?

  4. Your last bracket (for the $100,000 earner) in Ontario is wrong. The calculation is calculated over the entire bracket and not for the difference between the lower bracket and $100,000. As a result the table suggests that someone making $100,000 in Ontario makes more than a similar individual in Quebec. As a Quebec resident, I could see immediately that this had to be mistaken. In fact an Ontario resident pays about $6000 less.

  5. Great article, Jim. You’re right, paying tax is not a bad thing. A lot of people are happy to receive a tax refund. You shouldn’t be so happy when you realize you’ve been giving the government an interest-free loan. Owing taxes is better, as long as you put money aside during the year.

  6. I have nothing against paying taxes either. Ditto for “Employment” insurance, CPP/QPP, welfare and many other wealth distribution policies of the governement.
    What most people complain about is the visible WASTE of our money (yes it is our money, not the government(s). After all, is the government not by and for the people). If our money was managed correctly and wisely we would have little or no governemnt debt and maybe consequently less tax(es). How much money has been skimmed off the top on contracts to help along the sales process and ensure such and such a company gets the contract. Why is it that families on welfare (remember I am not against welfare) can not have even one working member after three generations? And so on.
    Administer the funds correctly and we will hear only from the bleeters who are not happy with anything – except living off the dole.


    • Grace, His tax brackets are for both Federal and Provincial tax combined, that is why it is different from the brackets listed in your link.

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