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Marginal Tax Rates – A Toronto Tax Lawyer Explanation

Flat vs Marginal Tax Rates

Taxpayers are often confused or unclear about the amount of tax for which they are actually liable. While it may seem as simple as looking up the values for each tax bracket, it is not quite that simple. The first source of confusion stems from the difference between a flat tax rate and a marginal tax rate. This confusion sometimes also leads individuals to believe that they may take home less money if they receive a raise bringing them up to a higher tax bracket. For example, the federal tax bracket for 2020 for individuals earning $48,535 or less is 15% and 20.5% for those earning up to $97,069. So for someone earning $50,000, a flat tax would mean that they fall into the 20.5% bracket and they would owe tax $10,250 and have a take-home income of $39,750, while an individual earning $48,000 would fall under the 15% tax bracket and owe $7,200 and have a take-home income of $40,800. However, Canada uses a progressive marginal tax system which means that the first $48,535 that every individual earns is taxed at the 15% rate and only income earned above that is taxed at the higher bracket rate. As a result, an individual earning $50,000 would owe taxes of $6,580.78 ($48,535 x 15% + $1465 x 20.5%) and result in a take-home income of $43,419.22. Essentially, a raise will always result in greater take-home income. A second point of complication is that each province levies income taxes in addition to Canada’s federal income tax which have completely different tax brackets. Finally, different types of income also have different tax treatments.

Ontario and Federal Tax Rates

 

The below tables show the marginal and effective tax rates for both Federal and Ontario taxes for 2020. Note that the final tax bracket has an indeterminate effective tax rate and total tax owed amount as they have no income ceiling.

Federal Tax
Income Range Marginal Tax Rate (%) Effective Tax Rate (%) Total Tax Owed
$0-$48,535 15 15 $7,280.25
$48,536 – $97,069 20.5 17.7 $17,229.52
$97,070-$150,473 26 20.7 $31,114.30
$150,474-$214,368 29 23.1 $49,643.56
$214,368+ 33 N/A N/A

 

Combined Tax
Income Range Marginal Tax Rate (%) Effective Tax Rate (%) Total Tax Owed
$0-$44,740 5.05 5.05 $2,259.37
$44,741-$89,482 9.15 7.1 $6,353.17
$89,483-$150,000 11.16 8.7 $13,106.87
$150,001-$220,000 12.16 9.8 21,618.75
$220,001+ 13.16 N/A N/A

 

Ontario Tax
Income Range Marginal Tax Rate (%) Effective Tax Rate (%) Total Tax Owed
$44,740 20.05 5.05 $8,970.37
$44,740 – $48,535 924.15 20.4 $9,886.86
$48,535 – $78,783 29.65 24 $18,855.39
$78,783 – $89,482 31.48 25 $22,223.44
$89,482 – $92,825 33.89 25.2 $23,356.38
$92,825 – $97,069 37.91 25.7 $24,965.28
$97,069 – $150,000 43.41 32 $47,942.63
$150,000 – $150,473 44.97 32 $48,155.34
$150,473 – $214,368 48.19 36.8 $78,946.34
$214,368 – $220,000 51.97 37.2 $81,873.29
$220,001+ 53.53 N/A N/A

 

As can be seen, the top combined Federal/Ontario marginal tax rate is 53.53%. However, that does not apply to all types of income. For example, only half of any capital gains earned are included in income, effectively halving the tax rate. Furthermore, eligible and ineligible dividends both provide a corresponding dividend tax credit which reduces the amount of tax owed by a taxpayer – you can learn more about the dividend tax credit here. The chart below shows a summary of the top marginal tax rate an individual pays in Ontario on different types of income in 2020:

Tax by Income Type

Income Range Top Marginal Tax Rate (%)
Employment Income 53.53
Capital Gains 26.76
Eligible Dividends 39.34
Non-Eligible Dividends 47.74

 

However, while the above chart shows the top marginal tax rates on different income types, taxpayers often earn a combination of different income types and further may not be paying tax at the top marginal bracket. As such, with all of these variables, calculating your actual tax rate can get complicated – speak to one of our top Toronto tax lawyers to learn more about how the different tax rates affect you.

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Income & Deductions

total tax

Total tax:

Total income
Federal tax
Provincial tax
After-tax income
Average tax rate
Marginal tax rate

Pro Tax Tip – Tax Minimization Planning

While complicated, the existence of these different tax rates also provides an opportunity for individuals to reduce the amount of tax they owe. These tax planning strategies can range from relatively simple things like prioritizing the earning of dividends or capital gains which are taxed at lower rates, to more complicated strategies like incoming splitting between family members or the use of corporations in various situations and for different types of income. Income splitting refers to tax planning strategies implemented by Canadian tax lawyers that shift income from a higher earning individual to a lower earning family member, reducing the amount of income taxed at the higher tax brackets, and thus reducing overall taxes incurred by the family. While income splitting opportunities have been significantly curtailed with the introduction of the new tax on split income (TOSI) which came into effect in 2018, certain strategies such as the making of a prescribed interest loan from the higher earning spouse to the lower earning spouse who then invests those funds to earn income are still available. Income splitting is also still possible in certain specific cases such as for pension income – upon reaching 65 years of age, the higher earning spouse can choose to split up to 50% of his or her pension income to the lower earning spouse. Not only that, effective estate planning such as an estate freeze or two wills can also result in significant tax savings as well as the minimization of probate fees. Whatever your situation might be, our experienced Toronto tax law firm can help you maximize your tax efficiency.

Disclaimer:

"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."

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