Marginal vs Effective Tax Rate: What's the Difference?

Your marginal tax rate is the tax rate on your next dollar of income — the highest bracket you fall into. Your effective (average) tax rate is your total tax paid divided by your total income. The effective rate is always lower than the marginal rate. For example, on $90,000 in Ontario, your marginal rate is about 29.65% but your effective rate is only about 22%. Earning more never results in less take-home pay — that’s a myth.

The Simple Definitions

Marginal tax rate: The tax rate applied to your last (highest) dollar of income. This is the bracket you “fall into.” If someone asks “what’s your tax rate?” and you answer with your bracket, you’re giving them your marginal rate.

Effective tax rate: Your total tax paid divided by your total income. This is what you actually pay as a percentage. It’s always lower than your marginal rate — often by a lot.

Why They’re Different: Canada’s Progressive System

Canada doesn’t tax all your income at one rate. It taxes your income in layers. The first chunk gets taxed at a low rate. The next chunk at a slightly higher rate. And so on.

Think of it like filling buckets. Your income fills the lowest-rate bucket first. Only after that bucket is full does income spill into the next one.

Here’s what the 2025 federal brackets look like:

Income Range	Federal Rate
$0 — $57,375	15%
$57,375 — $114,750	20.5%
$114,750 — $158,468	26%
$158,468 — $220,000	29%
Over $220,000	33%

Someone earning $90,000 doesn’t pay 20.5% on all $90,000. They pay 15% on the first $57,375 and 20.5% only on the remaining $32,625.

A Real Example: $90,000 in Ontario

Let’s walk through the federal tax on a $90,000 salary in Ontario for the 2025 tax year.

Federal tax before credits:

First $57,375 at 15% = $8,606
Next $32,625 ($57,375 to $90,000) at 20.5% = $6,688
Total federal tax before credits: $15,294

Minus the basic personal amount credit:

Every Canadian gets a tax credit on the first $16,129 of income. That credit is worth 15% x $16,129 = $2,419.

Net federal tax: about $12,875.

Now add Ontario provincial tax on top (Ontario has its own brackets), and you’ll end up with a combined tax bill somewhere around $18,000-$19,000 before accounting for CPP and EI.

The marginal rate on that $90,000 income is 20.5% federal + 9.15% Ontario = 29.65% combined. That’s what you’d pay on any additional dollar earned.

The effective rate is roughly 22-24% when you include both levels of government plus CPP and EI contributions. A full 5-7 percentage points lower than the marginal rate.

See your own marginal and effective rates with our income tax calculator. Plug in your salary and province and it breaks down both numbers for you.

The Myth That Won’t Die

“I don’t want a raise because it’ll push me into a higher bracket and I’ll take home less.”

This is wrong. It has always been wrong. It will always be wrong.

In a progressive tax system, only the income above the bracket threshold gets taxed at the higher rate. The rest of your income stays exactly where it was.

If you earn $57,375 (the top of the first federal bracket) and get a $1,000 raise, here’s what happens:

Your first $57,375 is still taxed at 15%. Nothing changes there.
Only the extra $1,000 gets taxed at 20.5%.
You keep $795 of that raise after federal tax.

You will never, under any circumstance, take home less money because of a raise in Canada’s tax system. Turn down a raise because of tax brackets and you’re literally leaving money on the table.

Why Your Marginal Rate Actually Matters

Knowing your marginal rate isn’t just trivia. It directly affects financial decisions you make every year.

RRSP contributions. When you contribute to an RRSP, you get a deduction at your marginal rate. If your marginal rate is 29.65%, a $10,000 RRSP contribution saves you $2,965 in tax. If your marginal rate is only 20.5%, that same contribution saves you $2,050. The higher your marginal rate, the more valuable your RRSP deduction.

This is why some people with lower incomes are better off using a TFSA instead — they’d save the RRSP room for a year when their marginal rate is higher. Use our RRSP calculator to see how much an RRSP contribution would save you at your current income.

Side income and freelancing. If you have a salaried job and earn extra money on the side, that side income gets taxed at your marginal rate, not your effective rate. On a $90,000 salary, every dollar of freelance income is taxed at roughly 29.65% combined, not the 22-24% effective rate on your salary.

Capital gains and investment income. Only 50% of capital gains are included in your income (on the first $250,000 of gains annually for 2025). The included portion gets added to the top of your income stack and taxed at your marginal rate.

Quick Reference: How to Find Your Rates

Your marginal rate is shown on your Notice of Assessment from CRA, but the fastest way to find it is to plug your income and province into our calculator. It’ll show you the combined federal-provincial marginal rate.

Your effective rate is simple math: take your total tax from line 43500 of your return and divide it by your total income from line 15000.

If those two numbers are the same, something has gone very wrong with your return.

The Bottom Line

Your marginal rate is what matters for planning future income and deductions. Your effective rate tells you what you actually paid. Both are useful. Check yours now — it takes less than a minute.

This article is for informational purposes only and does not constitute tax advice. Calculations based on 2025 CRA-published rates. Disclaimer