In Canada, when two individuals with different income levels both make one additional dollar, the income tax they pay on this extra dollar earned is different? That is because the Canadian tax system features a built-in fairness system in the form of progressive tax rates.
Income tax rates that apply to each dollar of additional income are different at different levels of taxable income. We call these rates marginal tax rates. As your taxable income rises, your marginal tax rate also rises.
Knowing your marginal tax rate is essential for successful tax planning. For example, tax can be saved by transferring income from family member with higher marginal tax rate to another member with lower marginal tax rate. Marginal tax rate also tells you how much you will save if you incur costs that are tax-deductible. Because of the marginal tax brackets, tax-deductible expenditures result more tax saving for higher-income taxpayers than for low-income taxpayers.
