What does the tax rate really mean?

By Randall Orser | Personal Income Tax

Pig Energy bar TNIn Canada we work on a marginal income tax system, or marginal tax rate, so the more you make the more you pay, however, you’re taxed in brackets. By that, you only pay the higher rate on the income earned in that bracket. You have a Federal rate and a Provincial rate. The Provincial rate varies widely from Province to Province, with Alberta having a flat rate of 10%, and Quebec having the highest rates (up to 25.75%).

The current Federal income tax rates are:

  • 15% on the first $43,953 of taxable income, +
  • 22% on the next $43,954 of taxable income (on the portion of taxable income over $43,953 up to $87,907), +
  • 26% on the next $48,363 of taxable income (on the portion of taxable income over $87,907 up to $136,270), +
  • 29% of taxable income over $136,270.

For example, John, who lives in British Columbia, makes $175,000 per year. Here’s how his marginal tax is figured out:


15% level        $ 6,592.95

22% level           9,669.88

26% level        12,574.38

29% level        11,231.70

Total Tax        $40,068.91

Provincial (BC)

5.06% level   $ 1,902.86      on first $37,606 of taxable income

7.70% level    2,895.74      on the next $37,607

10.50% level    1,169.81      on the next $11,141

12.29% level    2,274.14      on the next $18,504

14.70% level    6,635.87      on the next $45,142

16.80% level    4,200.00      on the amount over $150,000

Total               $19,078.42

Total Tax        $59,147.33

In the example above, the marginal tax rate is 45.8%, which is the addition of the top tax brackets of the Federal and Provincial rates in which your income falls, in this case 29% Federal and 16.8% Provincial. The average tax is 34% ($59,147.33 divided by $175,000 of total income). Average tax is the percentage of tax paid based on your total gross income and reflects the total tax you are paying. It is the total amount of tax you will pay through all the brackets divided by total income and will mathematically always be lower than the marginal tax rate.

Of course, the above just reflects the tax you’d pay if you didn’t have deductions, such as RRSPs, childcare expenses, etc., or your non-refundable tax credits, such as the basic personal exemption, spousal amount, employment credit, etc.

In this article we’re just talking about income taxes, however, there are many taxes that we as Canadians pay. Some of these taxes are: Carbon taxes, property taxes, sales taxes, fuel taxes, liquor and tobacco taxes, medical premiums, and more. Oh, and don’t forget about Canada Pension Plan & Employment Insurance (yes those are taxes). It would probably boggle the mind to figure out exactly how much we do pay.

If you looked at all the taxes that the average Canadian pays, it would probably end up being between 40% or 50% of your income going to some form of government. I don’t necessarily agree with that, however, until we figure out what government should really be doing for us, and not wanting government to do it all for us, we’re stuck with this high rate of taxes.

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