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There’s been much discussion about tax rates this year, with a cut in the 2016 federal tax rate for middle-income Canadians and an increase in the tax rate for Canada’s highest earners. Some provinces have also tinkered with their rates over the past few years. With all the recent changes, do you know what your actual tax rate will be in 2016? And, when we say “tax rate,” what rate are we really talking about?

While it’s true that the top marginal tax rate in more than half the provinces this year exceeds 50 per cent, that rate is literally payable only “at the margin.” This means the rate of tax you would pay on an additional dollar of income. Contrast this with the average, or effective, tax rate, which is often much lower due to the progressive, graduated tax system and the effect of various tax deductions and credits that reduce your rate.

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Individuals pay income tax at graduated rates, meaning that your rate of tax gets progressively higher as your taxable income increases. For example, on the first $45,282 of taxable income, an individual would pay federal tax at a rate of 15 per cent. On the next $45,282 of taxable income (i.e. from $45,282 to $90,563), there was a decrease of 1.5 per cent (from 22 per cent to 20.5 per cent) in the federal tax rate from 2015 to 2016, known as the “middle-income tax cut.” In contrast, high-income individuals with taxable income exceeding $200,000 saw the applicable tax rate rise four per cent (from 29 per cent to 33 per cent) from 2015 to 2016.