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Your Marginal Tax Rate

If you were to add up all your expenses, you may discover that your largest annual expense is your total tax bill. Depressingly, this is the reality for the average Canadian family. But the good news is there are ways to reduce your taxes, such as taking advantage of your available deductions and credits and implementing smart tax-planning strategies, like income splitting. With the right approach, you may be able to slash significant dollars off your annual payments. At the same time, understanding the tax system can save you money by helping you avoid penalties and interest charges.

One of the key concepts you'll need to get your head around in order to understand our tax system - as well as to find ways to cut your tax bill - is that of the marginal tax rate. Each taxpayer's marginal tax rate refers to the rate at which the last dollar he or she earned in any year was taxed.

Here's an example

Suppose you lived in Ontario and made $75,000 in 2017. Your marginal tax rate would have been 32.98%. In other words, if you made an extra $1,000, you'd have to give the government $330. But suppose your income was $6,000 lower, or $69,000 per year. Then your marginal tax rate would be only 31.15%. So if you made that extra $1,000, you'd only have to pay $311 in tax.

In addition to the marginal tax rate, you will also need to be familar with what's known as your effective tax rate. When you pay your income tax (whether it's deducted from your pay, you submit it for a business or you send the Canada Revenue Agency a personal cheque at tax time), the numbers are added up and presented to you as if you were paying the same rate for every dollar you earned. That's your effective tax rate. It's the average rate you must pay on all the money you make in any year.

The reason the two rates are different has to do with the progressive nature of our federal income tax system. Instead of applying the same tax rate to everybody, the system uses a tiered approach. Your income up to a certain level is taxed at one rate and income between that level and a higher specified level is taxed at a higher rate. From here, a still higher rate is applied, and so on.

As explained earlier, the top rate at which anyone is taxed is considered his or her marginal tax rate. Meanwhile, the average rate the taxpayer pays across all that income is considered his or her effective tax rate.

+ 2019 Top Individual Marginal Tax Rates

* Based on top personal income threshold of $138,586
* Combined Federal & Provincial Tax Rates for 2019 (includes surtaxes where applicable).
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