What Does the Tax Rate Really Mean?

By Randall Orser | Personal Income Tax

Many people get confused over what tax rate they’re actually paying. We hear about tax brackets and the rates within, but what rate are you actually paying? The Canadian tax system is based on marginal rates in tax brackets, and you’re taxed based on the income and the rate in that bracket.

What is a 'Marginal Tax Rate'

A marginal tax rate is the amount of tax paid on an additional dollar of income. The marginal tax rate for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon their earnings, with low-income earners being taxed at a lower rate than higher income earners. You’re taxed on each additional dollar of income

Your marginal tax rate has important implications for financial planning. You need to know your marginal tax rate to calculate what amount of your raise or bonus you’ll get to keep after taxes or whether it is worthwhile to contribute more to your RRSPs.

What is an ‘Average Tax Rate’

The average tax rate is pretty simple as it’s the total tax paid divided by your total income. The average tax rate reflects the total tax you are paying to the government.

The current federal rates are below (provincial rates are different for each province, so we won’t go into those right now).

Federal tax rates for 2017

  • 15% on the first $45,916 of taxable income, +
  • 20.5% on the next $45,915 of taxable income (on the portion of taxable income over $45,916 up to $91,831), +
  • 26% on the next $50,522 of taxable income (on the portion of taxable income over $91,831 up to $142,353), +
  • 29% on the next $60,447 of taxable income (on the portion of taxable income over $142,353 up to $202,800), +
  • 33% of taxable income over $202,800.

For example, James has an income of $75,500 for the 2017 tax year. His total federal tax would be $12,952.12. He’s taxed on the first $45,916 at 15% = $6,887.40 and the next $29,584 at $20.5% = 6,064.72. His average rate would be $17.15% which is the federal tax divided by total income ($12,952.12 ÷ $75,500.00).

Your total income is not taxed at the marginal rate but each dollar is taxed at the rate that your income fits as in the above example.

Of course, the above doesn’t reflect the actual tax paid, this is just an example, as your total tax bill will be depending on many factors such as RRSP contributions, donations, medical and more.


About the Author

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