The marginal tax rate is the amount of tax on your next dollar of taxable income. Canada’s income tax system is a progressive tax system. Different tax rates are applied on different levels of income.
Not all income is taxed at one rate
It is important to note that your income is not all taxed at one rate but at many rates as it moves across different levels (also called “bracket”). The income at the higher bracket is taxed at higher rate. The highest rate is your marginal tax rate. It tells how much will go to the taxman for an additional dollar you make.
Understanding marginal tax rate can save you tax
Understanding the concept of marginal tax rate can help you save tax. Consider an example. Mr. Robin is at marginal tax rate of 44%, while Mrs. Robin’s marginal tax rate is 20%. For the $100 interested earned in Mr. Robin’s saving account, $44 will go to the taxman. But if the money is saved in Mrs. Robin’s account, the taxman can only grab $20. $24 will be saved for the family. On the other hand. $1,000 contribution for Mr. Robin will generate $440 tax saving while it can only generate $200 if Mrs. Robin makes the contribution.