What Tax Brackets Really Mean

We’re back with the last installment in our “What are these??” series, where we covered the most common questions folks have about their paychecks. 

Today we’re tackling a common myth that refuses to die in Canada’s tax system:

“If I earn more, I’ll get bumped into a higher tax bracket and actually take home less.”

Let’s clear this up right now:
That’s not how tax brackets work!

So what is a tax bracket?

In Canada, we use a progressive tax system. That means your income gets taxed in chunks, not all at once.

Each “bracket” is a range of income that’s taxed at a specific rate. As you earn more, only the income that falls into the next bracket is taxed at the higher rate, not your entire income.

Here’s a very simplified example using rounded numbers:

Let’s say you earn $55,000.
Only the extra $5,000 over the $50,000 threshold gets taxed at 20%.
The first $50,000 is still taxed at 15%.

You’re not suddenly handing over 20% of your entire income just because you crossed a line.

The myth: “I’ll make less if I earn more”

We get where this fear comes from. Tax brackets sound intimidating, and the idea of “losing money” for working harder or getting a raise is frustrating.

But in reality, you always take home more when you earn more. The only thing that changes is the tax rate applied to the income within that new bracket.

Think of it like filling up buckets of water. Each bucket (or bracket) fills up with your income. Once one’s full, you start filling the next. The water in the last bucket is taxed at a higher rate, but the ones before it stay the same.

Why people get confused

A few reasons:

• The way pay stubs and tax forms display deductions isn’t always clear
  

• “Bracket” sounds like a hard boundary, when really it’s just a tier
  

• Most people aren’t taught this, and let’s be honest, no one wants to read CRA fine print
  

So the myth sticks, and people get worried about raises, bonuses, or even freelance gigs pushing them into the “next bracket.”

Can you lower your tax bracket with RRSPs?

Kind of, but let’s break that down.

You might hear people say they’re “trying to drop into a lower tax bracket” by contributing more to their RRSP (Registered Retirement Savings Plan). And yes, RRSP contributions reduce your taxable income, which means you could technically fall into a lower bracket.

The thing is:
That only helps if you were right on the edge of a bracket to begin with.

For example, if your taxable income is $101,000 and the next bracket starts at $100,000, a $2,000 RRSP contribution could lower your income to $99,000, dropping that top slice of income into a lower tax rate.

Sounds great, right?

It is, but…

• The savings are usually modest. You’re only saving on the tax rate difference for that small slice of income.
  

• The main value of RRSPs isn’t “dropping a bracket.” It’s deferring tax while your investments grow, then paying tax later when your income is lower (like in retirement).
  

So yes, RRSP contributions are definitely smart but using them just to drop a tax bracket isn’t a magic trick, it’s only effective if you’re very close to a bracket cutoff.

If you’re already contributing to your RRSP regularly, you’re on the right track. Just don’t stress about chasing a different bracket unless it’s part of a bigger financial strategy.

The takeaway?

If you earn more, you keep more - but usually not proportionately 🙂 This is where the confusion comes from, although earning more will always leave you with more.