Who this is for
Anyone who has wondered whether a raise, overtime or a bonus is worth it. Anyone comparing a tax rate they heard about with the tax they actually paid.
The five points
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Income is taxed in layers. The first layer of income is taxed at the lowest rate. The next layer at the next rate. And so on. Each rate applies only to the dollars in its own layer. The CRA publishes the thresholds and rates each year.
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Your marginal rate is the rate on your next dollar. It is the one that matters when you are deciding about extra income or an RRSP contribution. It is not the rate on your whole income.
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Your average rate is total tax divided by total income. It is always lower than your marginal rate, because the lower layers were taxed at lower rates. This is the rate that tells you what share of your income went to tax.
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Federal and BC stack. Both have their own brackets. Your marginal rate is the federal rate plus the BC rate for your income level. The lowest federal rate dropped from 15% to 14% in July 2025, giving a blended 14.5% for 2025 and 14% for all of 2026.
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Deductions and credits work differently. A deduction, like an RRSP contribution, reduces the income that is taxed, so it saves tax at your marginal rate. A credit, like the basic personal amount, reduces the tax itself, usually at the lowest rate. That is why an RRSP contribution is worth more to someone with a higher marginal rate.
A plain example
Suppose the first layer of income is taxed at 14% and the next at 20.5%. Someone earning $10 over the threshold pays 20.5% on that $10 only, about $2. They keep about $8 of it. Everything below the threshold is still taxed at 14%. There is no income level at which earning more leaves you with less after tax.
One thing many people do not realize
A raise cannot reduce your take-home pay by pushing you into a higher bracket. Only the dollars above the threshold are taxed at the higher rate, so every extra dollar earned leaves you with more after tax. What can change at certain income levels is eligibility for income-tested benefits and credits, which is a different question from the bracket itself.
What to prepare
- Your most recent Notice of Assessment, which shows total income and total tax
- Your slips for the current year
- Any planned change: a raise, a second job, retirement income, an RRSP contribution
When professional help may make sense
Income-tested benefits and the Old Age Security recovery tax depend on where your income sits. So does the point at which incorporating or splitting income between spouses makes sense. Those are planning conversations.
How Rex Tax may be able to help
We prepare your return and show you the marginal and average rates on it. Decisions about RRSPs, bonuses and timing are then made with real numbers. Our guide on refunds versus balances owing explains the other half of the picture.
Official sources
- CRA: Canadian income tax rates for individuals, current and previous years
- CRA: What you need to know for the 2026 tax filing season (rate change)
This guide is general information, not advice about your situation. It reflects the rules for the 2026 tax year. It has not yet been reviewed by a practitioner. The information was checked against the official sources listed above on the date shown. Rules change. Check the official sources above or ask us. How we prepare these guides.