Are All Income Sources Taxed Alike?

No, different income sources attract different marginal tax rates.

A taxpayer’s marginal tax rate is a measure of the rate of tax that they will pay on the next dollar of income earned (and therefore it is also a measure of the amount of income tax that would be saved by a deduction of one dollar). There  are four different rates applied to tax payable at the federal level—the higher the taxpayer’s income, the higher the tax rate. Each province also levies taxes on its residents in a similar manner. Only one province—Alberta—has a flat tax rate.

Marginal tax rates can differ, depending on a variety of tax attributes attached to your income. For example, the highest marginal rates will apply to ordinary employment income, interest income, rental income as well as public and private pension sources, such as RRIF withdrawals.

Other income sources, such as dividend income and capital gains income resulting from increases in value of capital assets upon disposition, attract lower marginal tax rates.

Because of these tax preferences, a taxpayer’s marginal tax rate on income differs depending on the type of income as well as their province of residence.