A Marginal Tax Rate (MTR) is the tax rate (%) paid on each additional dollar earned. It is called ‘Marginal’ as it refers to the next incremental dollar earned.

The tax rates change with higher income. The more income, the likely the tax rate is higher. Federally, there are currently (2014 tax year) four tax brackets: Pay 15% on the first $43,953. Pay 22% on every extra dollar between $43,953 and $87,907, and so on for two higher brackets.

Provincially, there are many more tax brackets. This means a smaller increase in income is more likely to lead to an increase in provincial taxes than federal.

What does this mean for tax planning? First one should maximize deductions from income. A deduction is subtracted from taxable income. A good example is RRSP contributions. Second, one should have their taxes reviewed by a professional every few years to discuss ways of efficient tax planning with regards to the MTR.