Canadians file personal income tax returns every year. The federal government, together with each province or territory, applies income tax based on how much your clients earn. The process is not as simple as taking one flat percentage of the entire income. Instead, Canada uses a system of tax brackets, each with its own rate. This is where the marginal tax rate comes in.
In this article, Wealth Professional Canada will highlight Canada’s marginal tax rates. We’ll discuss how the federal, provincial, and territorial brackets are structured and how to use these concepts when working with clients. You can also browse the latest marginal tax rate news when you scroll to the bottom for the latest discussions, proposed changes, and breaking best practices!
A marginal tax rate is the rate at which your clients pay tax on every additional dollar of income. Canada has a progressive tax system. This means that higher slices of income are taxed at higher rates. As income rises, the portion that falls into a new bracket is taxed at the higher rate that applies to that bracket.
Income is divided into portions, often explained as brackets. Each portion that sits inside a bracket is taxed at that bracket’s rate. As soon as part of a client’s income crosses into the next bracket, that extra portion is taxed at the new rate. The rest of the income that sits in the lower brackets keeps its lower rates.
This structure exists at both the federal and provincial or territorial levels. That means every taxpayer faces at least two marginal tax rates. There is one for the federal system and another for the system where they live. The combined effect of these two systems determines the total tax your clients owe on each extra dollar of income.
Learn more about marginal tax rates when you watch this clip:
Do you know that only one in five Canadians knows the latest tax rules? That’s why you must go the extra mile and guide your clients in navigating their marginal tax rates.
For the 2025 tax year, the government has set five income tax brackets. Each has its own rate and income range. To identify your clients’ marginal tax rates, you need to know which federal tax bracket their income falls into:
| Taxable income threshold for 2025 |
|---|
| $57,375 or less |
| over $57,375 up to $114,750 |
| over $114,750 up to $177,882 |
| over $177,882 up to $253,414 |
| over $253,414 |
All figures are from the Canada Revenue Agency (CRA)’s website.
These thresholds are based on taxable income. This is the income that remains after deductions and exemptions are applied. The government adjusts tax brackets and rates over time, often in line with inflation.
Consider Client A who earns $150,000 in taxable income. Using the figures above, the income will be taxed across three federal brackets:
Client A’s income has been taxed in three brackets, at three different rates, even though the highest bracket reached is the one at 26 percent.
This example is a helpful way to show that moving into a higher bracket does not mean all previous income is taxed at that higher rate. Only the dollars above the threshold for the new bracket face the higher rate.
You can estimate your clients’ marginal tax rates using the published tax brackets for both the federal government and the relevant province or territory. The process follows four simple steps:
Let’s discuss them one by one below:
This means total income for the year after allowable deductions and exemptions. Contributions made to Registered Retirement Savings Plans (RRSPs) can reduce taxable income. Your clients might also have other deductions such as certain employment expenses or medical payments.
Place the taxable income into the federal tax brackets in order. You’ll need to start from the lowest bracket and move upward until all the income is accounted for.
Multiply the portion in each bracket by that bracket’s rate and add the results to estimate total federal income tax. The bracket that holds the final slice of income tells you the federal marginal rate.
Repeat the process using the provincial or territorial brackets. Again, start with the lowest bracket and work your way up until you have applied a rate to all the taxable income. The bracket that contains the final slice shows the provincial or territorial marginal rate.
Finally, add the federal marginal tax rate and the provincial or territorial marginal tax rate percentages to estimate the combined marginal tax rate. This is the rate that applies to the next additional dollar of taxable income.
Marginal tax rate and average tax rate are related but distinct concepts. Some clients might confuse the two and treat their marginal rate as if it were their overall tax burden. Helping them separate these ideas improves their knowledge of how much tax they need to pay.
The average tax rate is the total income tax paid, divided by total taxable income. It tells your clients what share of their income went to income tax for the year. You calculate it after you know the final tax bill. As mentioned earlier, the marginal tax rate is the percentage that applies to the last dollar earned, or the next extra dollar that could be earned.
Because tax is charged at lower rates on earlier portions of income, the average tax rate is usually lower than the marginal rate. This is true in Canada’s progressive tax system where the rate increases in higher brackets.
When your clients see a large, combined marginal rate, they might assume that rate is applied straight across all their income. That’s why you need to show them the average tax rate often to avoid confusion.
Marginal tax rates are not just a technical topic for tax season. They influence many day-to-day planning decisions for your clients. They also help you show the value of tax deductions. Because deductions reduce taxable income, they can lower the portion that sits in the higher brackets.
For someone whose income is close to the edge of a bracket, extra deductions might keep more dollars in the lower rate range. They can also reduce the tax on additional income.
RRSP contributions are a good example. Since contributions reduce taxable income, larger contributions can reduce the slice of income that sits in the higher brackets. This can be beneficial for higher earners who are firmly inside the upper brackets.
Marginal rates vary by province and territory as we’ve discussed above. Two clients with the same taxable income but who live in different provinces will face different combined marginal rates.
As a financial advisor, you can highlight that federal rates are uniform across the country, while provincial and territorial systems differ. This helps your clients understand why their friends or relatives in other regions might face different overall tax bills even with similar incomes.
Watch this video to learn more about the country’s tax system and how marginal tax rates are structured:
You must always exercise diligence and know your role as a financial advisor. If needed, advise your clients to hire a tax expert or accountant for a more in-depth discussion of their tax circumstances.
While it is not possible to change the structure of the tax system, there are ways to reduce the income that falls into higher brackets. Help your clients by using these strategies to improve their net position:
Deductions reduce taxable income, which in turn lowers the income that sits inside the higher brackets. In some situations, this can move part of the income back into a lower bracket and reduce the amount exposed to higher marginal rates.
RRSP contributions lower taxable income directly and are often one of the most impactful ways for working Canadians to reduce their exposure to high marginal rates while also building retirement savings.
Credits reduce tax payable directly and improve net income, even though they do not change taxable income or alter which bracket the last dollar sits in.
When your clients combine these approaches, they can reduce their total tax bill and increase their capacity to save. These strategies can also support their financial goals such as:
Marginal tax rates can look intimidating when your clients first encounter them, especially when several brackets and different systems are involved. But once you walk them through how the brackets work and how only parts of income are taxed at each rate, it becomes more manageable.
For income earned in Canada, every taxpayer faces both a federal and a provincial or territorial marginal rate. Income flows through the brackets one portion at a time. The last portion of income, which sits in the highest bracket reached, determines the marginal rate that applies to every extra dollar of income.
With this, your clients are better prepared to set money aside for taxes, weigh new income opportunities, and plan their saving with more intention. Over time, these conversations can support more confidence around tax season and financial plans that bring your clients closer to their long-term goals.
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