Marginal Tax Rate

Your marginal tax rate is the percentage of tax you pay on the next dollar you earn. It’s not the rate applied to all your income. Canada uses a graduated tax system, meaning different portions of your income are taxed at different rates.

How it works

Let’s say your total income is $60,000. You don’t pay the same rate on all of it. The first chunk is taxed at a lower rate, the next chunk at a slightly higher rate, and so on. Your marginal rate is whatever bracket that last dollar falls into.

In Canada, you pay both federal and provincial income tax, so your combined marginal rate depends on where you live and how much you earn. For someone earning $60,000 in Ontario, the combined marginal rate is roughly 30%. At $100,000, it’s closer to 43%.

Why it matters for investing

Your marginal tax rate affects how much you actually benefit from certain investment decisions.

RRSP contributions reduce your taxable income. If your marginal rate is 40%, a $10,000 RRSP contribution saves you $4,000 in tax that year. If your marginal rate is only 25%, the same contribution saves you $2,500. That’s why RRSPs tend to be more valuable for higher-income earners.

Capital gains, dividends, and interest income are all taxed differently, and your marginal rate determines the actual dollar impact. Understanding where you sit on the tax scale helps you make better decisions about which accounts to use and what types of investments to hold where. Our TFSA vs. RRSP guide explains how your marginal rate affects which account makes more sense for you.