In Canada's progressive taxation system, it's important to understand the difference between average and marginal tax rates:

Average tax rate:

• Definition: Your total tax divided by your total income
• Represents the overall percentage of your income paid in taxes

Marginal tax rate:

• Definition: The tax rate applied to your next dollar of income
• Varies based on which tax bracket your income falls into

Example:
Let's consider a taxpayer with a taxable income of $65,000 (using 2024 rates):

1. Average federal tax rate:

   • Total federal tax: $10,252.31

     • First $55,867 taxed at 15%: $8,830.05
     • Remaining $9,133 taxed at 20.5%: $1,872.26

   • Average rate: 15.77% ($10,252.31 divided by $65,000)

2. Marginal federal tax rate:

   • 20.5% (the rate for the tax bracket this income falls into)

How progressive taxation works (2024 federal rates):

• First tax bracket (up to $55,867): 15% federal tax
• Second bracket ($55,867 to $111,733): 20.5%
• Third bracket ($111,733 to $173,205): 26%
• Fourth bracket ($173,205 to $246,752): 29%
• Highest bracket (over $246,752): 33%

Important notes:

• Each province has its own marginal rates and tax brackets
• This example doesn't account for tax credits or deductions
• Tax brackets and rates typically change annually

Understanding your tax rates:

1. Check your taxable income on your tax return
2. Identify which federal and provincial tax brackets you fall into
3. Your marginal rate is the highest bracket rate that applies to your income
4. Calculate your average rate by dividing total tax by total income

Remember:

• Your average rate is typically lower than your marginal rate
• Tax planning strategies often focus on managing marginal rates

If you need assistance understanding how tax rates apply to your specific situation in Wealthsimple Tax, please contact Wealthsimple support. For complex tax planning or questions about optimizing your tax situation, consider consulting with a tax expert.