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Income tax brackets and your marginal rate

An Ontario resident pays two income taxes on one return: federal and Ontario. Each charges a rate on a slice of taxable income, and the rate rises with each slice. Only the income inside a slice is taxed at that slice's rate, so earning more never lowers take-home pay.

The rules

2026 federal brackets, on taxable income: 14% up to $58,523; 20.5% to $117,045; 26% to $181,440; 29% to $258,482; 33% above.

2026 Ontario brackets: 5.05% up to $53,891; 9.15% to $107,785; 11.16% to $150,000; 12.16% to $220,000; 13.16% above.

  • Basic personal amounts shelter the first part of income as a credit. Federally it is $16,452, falling to $14,829 as net income rises from $181,440 to $258,482; it is credited at 14%. Ontario's is $12,989, with no phase-out.
  • Ontario surtax: 20% of Ontario tax above $5,818, plus a further 36% of Ontario tax above $7,446.
  • Ontario Health Premium: nil up to $20,000 of taxable income, rising in steps to $300, $450, $600, $750 and a maximum of $900 above $200,000.
  • A small Ontario tax reduction (a $300 base amount, doubled) removes Ontario tax at very low incomes.
  • The federal Canada employment amount ($1,501) is a further credit for employment income. CPP and EI earn credits and deductions too; see CPP and EI contributions.

Marginal and average rate

average rate  = total tax ÷ income
marginal rate = tax on the next dollar earned

The marginal rate is the federal and Ontario slice rates added together, and once Ontario tax passes the surtax thresholds the Ontario part is multiplied by 1.2, then by 1.56. At the bottom that is 14% + 5.05% = 19.05%. At the top it is 33% + 13.16% × 1.56 = 53.53%. The marginal rate is the one that matters for an RRSP deduction or a withdrawal; see RRSP room and deduction. The average rate is always lower.

What the engine does

  • Assesses each person on their own return, using their own income; see taxes are per person.
  • Applies the brackets, credits, surtax and health premium above to every year of the plan, and tests the federal basic personal amount's phase-out against net income.
  • Grows every threshold after 2026 at the plan's inflation rate, as described in tax brackets after 2026. The health premium steps are held flat.
  • Values an RRSP or FHSA deduction at the person's own marginal rate, and taxes a withdrawal as income in the year it is taken.

What it deliberately does not

Only Ontario is modelled, and part-year residence is not. Medical expenses, charitable donations, disability, child-care and similar lines are not modelled.

Connected to

  • Capital gains and the adjusted cost base · Selling an investment for more than its adjusted cost base is a capital gain, and half of it is added to taxable income in the year of the sale. Growth that has not been sold is not taxed.
  • CPP and EI contributions · Canada Pension Plan and Employment Insurance contributions come out of each paycheque up to a yearly ceiling. The plan calculates both from salary, and treats the self-employed as paying both halves of CPP.
  • Ontario's credits for lower incomes · Ontario pays three credits to people with modest incomes. LIFT reduces tax on low earnings, while the sales tax credit and the energy and property tax credit arrive as the Ontario Trillium Benefit.
  • RESPs and the education grant · Contributions attract a 20% government grant, up to $500 a year, and $7,200 for a child's lifetime, up to a $50,000 contribution limit. Growth and grants come out taxed in the student's hands, at a rate that is usually near zero.
  • RRSP room, deduction and withdrawals · Room accrues at 18% of earned income up to the annual cap, contributions earn a deduction refunded the following April, and withdrawals are taxed as income. The plan assumes you start with no carried-forward room unless you say otherwise.
  • Tax brackets after 2026 are projected, not published · Every year after 2026 is taxed with the 2026 brackets, personal amounts, credits and CPP/EI ceilings grown at the plan's inflation rate. That is how CRA indexes them, but the real figures are announced each fall and will differ.
  • Tax withheld from pay, and the April refund · Employers withhold income tax, CPP and EI from each paycheque as an estimate. The real tax is worked out on the return, and the difference arrives or is owed the following April.
  • Taxes are per person · Canada has no joint return, so each of you is taxed on your own income with your own brackets and credits. The routes that do move income between partners — pension splitting, spousal RRSPs, prescribed-rate loans — are not modelled, so a couple's real bill may be lower than this.
  • TFSA contribution room · Room starts accruing the year you turn 18, not the year you open an account, and it never expires. Withdrawals come back the following January. Limits past 2026 have not been announced, so the plan projects them by the rule the Act sets and says so.
  • The alternative minimum tax · A parallel tax calculation that applies a flat rate to a wider measure of income, so someone with a large capital gain cannot owe almost nothing. The higher of the regular and minimum tax is paid, and any extra is carried forward as credit.

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