The marginal tax rate is the tax rate that applies to your tax bracket.
The Canadian government uses a progressive income tax system, and the percentage of tax that you pay depends on your income bracket for the year.
There are multiple income tax brackets, with the tax rate progressively increasing as taxable income increases.
The tax brackets are generally adjusted every year due to factors such as inflation.
How is Marginal Tax Rate Calculated?
Federal Marginal Tax Rate for Personal Income
The Federal marginal tax rates for 2021 income earned is calculated as follows:
- 15% on the first $49,020 of taxable income,
- 20.5% on the portion of taxable income over 49,020 up to $98,040,
- 26% on the portion of taxable income over $98,040 up to $151,978,
- 29% on the portion of taxable income over 151,978 up to $216,511,
- 33% of taxable income over $216,511
For example, if your taxable income for 2021 is $80,000, your marginal tax rate will be 20.5%, and your income will be taxed as follows:
The first $49,020 will be taxed at 15% = $7,353
The next $30,980 will be taxed at 20.5% = $6,350.90
Total federal tax payable = $13,703.90 ($7,353 + $6,350.90)
For 2022, the tax brackets have increased due to indexation for inflation and other factors.
The new tax brackets for 2022 are:
- 15% on the first $50,197 of taxable income,
- 20.5% on the portion of taxable income over $50,197 up to $100,392,
- 26% on the portion of taxable income over $100,392 up to $155,625,
- 29% on the portion of taxable income over $155,625 up to $221,708,
- 33% of taxable income over $221,708
Provincial Marginal Tax Rate for Personal Income
The Provincial tax rate you pay on your taxable income varies by province.
Except for Quebec, the provincial marginal tax rates for the provinces are calculated in a similar way to the federal marginal tax rates.
Based on your income bracket, the tax rate that applies to you increases for every portion that exceeds the next tax bracket.
For example, if you have to file your 2021 income tax and benefit return to the Ontario government, in addition to the federal tax rate, your provincial tax will be calculated as follows:
- 5.05% on the first $45,142 of taxable income,
- 9.15% on the next $45,145,
- 11.16% on the next $59,713,
- 12.16% on the next $70,000,
- 13.16% on the amount over $220,000
Based on the $80,000 taxable income example used above, the provincial tax paid to the Ontario government will be calculated as follows:
First $45,142 will be taxed at 5.05% = $2,279.67
The next $34,858 will be taxed at 9.15% = $3,189.5
Total Ontario provincial tax payable = $5,469.2 ($2,279.67 + $3,189.51)
Marginal vs Average Tax Rate
Your average tax rate is calculated as the total tax you pay divided by your total pre-tax income.
Using the federal tax example above, with a taxable income of $80,000 and total federal tax payable calculated as $13,703.90, your average tax rate is calculated using the formula:
Average federal tax rate = Total taxes paid / Total taxable income
Your federal average tax rate = 17.1%, that is ($13,703.90/$80,000)
While your federal average tax rate is 17.1%, your federal marginal tax rate is 20.5%.
You will remain in this marginal tax rate until your taxable income exceeds $98,040 but remains lower than $151,978.
Then, your new marginal tax rate will be 26%.
Marginal vs. Effective Tax Rate
Your effective tax rate is also calculated like an average tax rate.
Your effective tax rate takes into account the total tax you paid in the year to both the federal government and the provincial government.
Using the example above, the effective tax rate can be calculated as:
Federal tax payable: $13,703.90
Provincial tax payable for Ontario: $5,469.18
Taxable income: $80,000
Effective tax rate = ($13,703.90 + $5,469.18)/$80,000
Your 2021 effective tax rate = 23.96%
Frequently Asked Questions
- What is the highest marginal tax rate in Ontario?
The highest marginal tax rate in Ontario is 13.16% and it applies to taxable income over $220,000.
- What is the highest marginal tax rate in Canada?
The highest federal marginal tax rate in Canada is 33%, which applies to the portion of taxable income over $216,511.