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Updated 2mo ago.
Updated 2mo ago.
The marginal tax rate is the percentage of tax applied to the last dollar of income earned. In Canada, income tax is progressive: the first dollars are taxed at a lower rate and the rate increases in brackets as income rises. The marginal rate combines federal and provincial tax, and therefore varies by province of residence.
In 2024 in Ontario, if your taxable income is $60,000, your combined marginal tax rate (federal + provincial) is approximately 29.65%. This does not mean all your income is taxed at 29.65% — only the dollars above the previous bracket. If you contribute $5,000 to your RRSP, you save approximately $1,483 in tax ($5,000 × 29.65%). This is why RRSP contributions are more beneficial when your marginal rate is high.
Your marginal tax rate guides several key financial decisions. Contributing to an RRSP is more beneficial when your marginal rate is high (you deduct at a high rate and withdraw at a lower rate in retirement). The TFSA, on the other hand, is advantageous regardless of your marginal rate. Canadian dividends benefit from the dividend tax credit, which reduces their effective marginal rate. Knowing your marginal rate helps you optimize between RRSP, TFSA, FHSA, and the choice of investments in a non-registered account.