One of Justin Trudeau’s election promises was to lower income taxes for the middle class and raise them for the wealthy, an election promise that he has made good on. The federal income tax rate for income between $45,282 and $90,563 was cut from 22% to 20.5% and the rate for income above $200K was increased from 29% to 33%.
The actual savings or cost to you depends on a few factors, but mostly on how much you make and which province you live in. With provincial taxes added, New Brunswick stands on top with the highest marginal tax rate of 58.75%, while British Columbia is the lowest at 47.70%. Ontario falls somewhere in the middle at 53.53%.
In Canada, we have a progressive tax rate system, meaning that there is a lower tax rate for the first band of income and increasingly higher rates of tax as income increases. The chart below demonstrates the rate bands for income in Ontario.
The chart below shows the comparison between the tax payable, top tax rate and average tax rate on incomes of $30K, $50K, $90K, $200K and $250K
Overall, tax payable is lower in Ontario in 2016 for incomes up to $224K and increases for incomes above this level. Be cautious… even if your employment income is below $224K, you can still end up paying higher taxes if you sell an asset, such as a cottage, and incur a capital gain that increases your taxable income. Estates can incur the high tax rates if the gain on assets, income from investments and remaining RRSP funds, which are fully taxable at death if there is no spouse or dependent child to roll the funds to, add up to more than $224K.
Tax planning is now more important than ever for people with taxable incomes over $224K. There are many ways to reduce the tax payable such as:
- The use of registered programs such as RRSPs, TFSAs and RESPs
- Using a corporation for tax deferral
- Income splitting
- Loans to spouses with lower incomes at the current prescribed rate of 1%
- Making a charitable donation
- The tax sheltered growth of cash value within a permanent life insurance policy and the tax free payout of life proceeds
There are a number of strategies to consider and a conversation with your accountant/financial advisor is recommended each year.
Tax rates have changed for 2016. Will you be paying more or less tax?