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Marginal tax rate is the percentage of tax you will pay on the last dollar of your income. Income tax increases in stages which are also called tax brackets. According to Canada revenue agency the 2011 Canadian tax brackets of the Federal government are:

- 0% on income below $41,544
- 22% on income between 41,544 and $83,087
- 26% on income between $83,087 and $128,799
- 29% on income of $128,800 or above
(data source)

This means that if your income is $41,500, your marginal tax rate is 0% but if your income is $42,000 then your marginal tax rate is 22%. What does this mean in terms of the taxes you have to pay. If your income is $42,000, you will pay no tax on the first $41,543 and 22% on the remaining $457.

The best way to reduce taxes for most tax payers is to reduce your marginal tax rate. There are several ways to reduce marginal tax rate such as splitting income, claiming tax credits or investing in registered savings plans. In the example above, if the tax payer invests $457 in RRSP, he would not have to pay tax on this amount.

The taxpayer may have to pay nothing the federal government but he also has to pay provincial taxes. Provinces and territories also have their tax brackets. Alberta is an exception in the sense that it has a 10% flat rate income tax on all income regardless of the income level of the tax payer. So the marginal tax rate in Alberta is 10% regardless of income.

Marginal tax rate depends on:
- tax payer's level of income
- type of income
- province of residence