Average and marginal tax rates

If you choose to support SimpleTax, you’ll see a couple of fun charts as our small way of saying thank you.


While the first chart is self-explanatory, a couple of people have asked us to explain the second: what are average and marginal tax rates?

Your average tax rate is the percentage of your income that went to the government; it’s the total tax you paid divided by your total income. As an example, if you made $10,000 and paid $1,000 in taxes, your average tax rate would be 10%.

Marginal tax rates are little more complicated because Canada uses a progressive tax system. As you make more money, your tax rate increases; in other words, you keep less of each dollar you earn. Your marginal tax rate is the amount of tax you would pay on your next dollar of income.

It’s easiest to understand by looking at the federal marginal tax rates on the Schedule 1:

Federal Margin Tax Rates

No matter how much money you earn, you only pay 15% tax on your first $45,282 of income1. Then, you pay 20.5% tax on your next $45,282 of income, up to $90,563; 26% tax on your next $49,825, up to $140,388; 29% tax on your next $69,612, up to $200,000; and 33% tax on any amount earned over that. This is progressive taxation. As you make more money, you keep less of each dollar.

So, if you earn $50,000, your average federal tax rate is 15.5% ($7,759 divided by $50,000) and your marginal tax rate is 20.5%. If you earned one additional dollar, the federal government would take 20.5 cents of that dollar.

Don’t forget you also need to layer on provincial taxes. Every province has their own marginal rates and income thresholds.

1 You actually pay less than that because your first $11,474 is exempt from tax.

2 Updated September 23, 2016 We now use 2016 tax brackets in our example. We also removed a comment about Alberta’s former flat tax rate.

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