Personal Income Tax Rate Changes

Since the election of the new federal government, the Liberals upheld their promise to lower the tax rates for middle-class and implement a new tax bracket for wealthy Canadians earning greater than $200,000. 

As the image of the ladder shows, your tax bill climbs along with your income. Everything is relevant to the amount of money you earned.  We all pay the same tax rate for the first $45,282 of income earned.   Every Canadian starts from the bottom and works their way up. The difference is where your income stops.

If your income is above the first tax bracket, the good news in 2016 is the Federal Tax rate has been lowered from 22% to 20.5%.  The bad news is you are still paying 20.5% in Federal taxes once your income exceeds the first bracket.  The valuable news is you can save essential tax dollars for each dollar of contributions invested in an RRSP (Registered Retirement Savings Plan.)

 

 I often encounter people who still say that RRSPs don’t work.  The rationale behind the advantages of RRSPs relates to the philosophy about a glass being seen as half full or half empty.  You can choose to be the optimist or the pessimist. If you truly want to be the superior optimist, you can add a unique spin and rationalize that regardless whether the glass is half full or half empty, there’s room for more wine. Wine can be as sweet as saving money from being taxed. 

Here’s how . . .

Money invested into a registered investment will reduce taxes.  You are technically deferring the taxes from being paid at a time when your income is at its highest.   Eventually when the funds are withdrawn, whether you chose the optimal time or whether you are mandatorily forced to begin withdrawals at age 71, here lies the expectation that your income may be in a lower tax bracket when you retire.  Not to mention, you have sheltered the earnings from taxation in your RRSP investments over the years which attributed to the growth.       

At age 65, you will be rewarded with two additional tax credits, the age and pension income amounts, to offset your tax bill.   The added bonus may be your ability to split your retirement income with your spouse to equalize your incomes and take advantage of each person’s tax credits.  Technically, as shown in the graph below, the first $20,599 of an individual’s income is looked upon as the tax-free zone since these credits offset taxable income.

 

Federal Tax Credit 2016	Federal Tax Credit	Sask Personal Tax Credit
Basic Personal Amount	$11,474	$15,843
Age Amount	$  7,125	$  4,826
Pension Income Amount	$  2,000	$  1,000
	$20,599	$21,669

 

In an attempt to sharpen your perspective, consider RRSP savings as the income that will one day replace the pay cheque you receive today.  If saving taxes today can reward you with a rich income in the future, you may wish to seize the opportunity to retrieve valuable tax dollars. 

 

 

 

Can Your Savings Be Hiding in Your Taxes?

Benjamin Franklin said, “In this world nothing can be said to be certain, except death and taxes.”   You can attest to the fact that taxes are real and they eat away at your earnings.  Whether you are an employee, self-employed, or owner of a corporation, everyone must file a tax return.  Understanding the federal and provincial tax brackets will help you determine appropriate tax planning strategies. Just as much as the government needs money to support their spending habits, so do we.  The question is how we can keep more change in our pockets.  

The first step is being aware of your annual income. As an employee, both your T-4 Statement of Remuneration Paid and last pay statement of the year indicate the total amount you have earned.  This information is significant so you can identify how you will be taxed according to Canada Revenue Agency’s tax brackets.  As your income climbs so will your tax bill.  If you wonder where some of your money is hiding, check Box 22 on your Statement of Remuneration Paid.  Your savings may be hidden there.  Your annual income will determine whether you want to regain some of this money.

These two charts illustrate the tax rates for each respective bracket.  Since every province has different tax brackets and rates, you will need to check the province where you reside.  For example, Alberta has only a flat tax rate of 10% regardless of income.   You can expect both governments, federal and provincial, to be waiting for your dollars.

 Don’t be fooled into believing that all your income is taxed at one rate.  The marginal tax rate (MTR) refers to the rate of tax a taxpayer will pay on his next dollar of income. What this means is you start at the bottom and pay the lowest rate until your income crosses the threshold to the next bracket.  Only then will your next dollar of income be calculated at the next level.  If you live in Saskatchewan, your tax rate starts at 26% (15% Federal + 11% Provincial) until your income is higher than $43,292.  Once you step over this line, you can expect the portion of your income above $43,292 to be taxed at 35% until you reach the next bracket.      

As discussed in the last week’s blog, A Season and A Reason for Your Investments, knowing your annual income today and in retirement is important.  This information determines whether you use a Registered Retirement Savings Plan or a Tax Free Savings Account for saving money.  Since you can’t run away from paying taxes, your best hope is paying the least amount.  When you cross over the threshold to the next tax bracket, contributions to Registered Retirement Savings Plans become beneficial.  Depending on your available RRSP contribution limit, reducing your taxable income to the top of the lowest bracket, $43,292, (or to the nearest bracket) with an RRSP contribution will fatten your savings in two ways.  You will pay less in taxes and your money will now be in your hands earning income inside a tax-sheltered investment.   Your options then multiply.

• You may receive a tax refund to place inside a Tax Free Savings Account to fund other goals.  
• The withdrawals from your RRSP may be “pension-split” with your spouse in retirement to create more tax saving opportunities.
• Money withdrawn from your RRSP can be use either for a home purchase or post- secondary education.

The most complicated topic in the financial planning spectrum has to be taxes. How can it not be when the Income Tax Act is 3,259 pages?  Generally, if there are any savings to be had, it’s in the taxes you pay.    When you examine your previous year’s tax returns, notice the three income levels before the Canada Revenue Agency determines your taxable income:  Total Income, Net Income, and Taxable Income.  Not only do they determine your taxable income but also whether you are eligible for government benefit programs such as Child Tax Benefits, Old Age Security, Guaranteed Income Supplement, and Allowance. 

Writing about various tax saving strategies is best completed in segments.   So for now, the most significant step is to understand the tax brackets. Knowing your annual income is the starting point.  Even if you are self-employed and your income continues to rise significantly, setting-up a corporation to allocate income differently is a valuable strategy.  Savings may be hiding in everyone’s tax bill.