# It's 2016 Do You Know What Your Tax Rate Is?

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4 Figure 4 Marginal and average tax rates with \$50,000, \$100,000 or \$250,000 of ordinary in 2016 \$50,000 \$100,000 \$250,000 Marginal tax rate Average tax rate Marginal tax rate Average tax rate Marginal tax rate Average tax rate AB 30.5% 18.4% 36.0% 25.0% 47.0% 35.3% BC 28.2% 16.7% 38.3% 23.9% 47.7% 36.0% MB 33.3% 21.6% 43.4% 29.5% 50.4% 40.0% NB 35.3% 20.8% 42.5% 28.9% 54.0% 41.1% NL 33.0% 19.9% 39.3% 27.2% 48.3% 37.4% NS 35.5% 21.9% 43.5% 30.0% 54.0% 41.6% ON 29.7% 16.8% 43.4% 25.2% 53.5% 39.1% PEI 34.3% 21.8% 44.4% 29.7% 51.4% 40.6% QU 37.1% 22.1% 45.7% 30.6% 53.3% 42.5% SK 33.5% 19.8% 39.0% 27.2% 48.0% 37.4% Source: EY 2016 Personal tax calculator, which reflected known rates as of January 15, 2016 Let s take a look at three examples and review how the type of you earn can have a significant impact on your marginal and average tax rates. which not only eliminates her tax bill on the dividend but acts as a tax shield to recover some of the taxes she would otherwise pay on her interest and capital gains. Example 1 Angelica lives in B.C. and earns \$50,000 of employment in Assuming only the basic personal amount, she will pay about \$8,400 in tax, yielding an average tax rate of 16.8% (\$8,400 / \$50,000). Her marginal tax rate would be 28.2% on each additional dollar of ordinary. On capital gains, her marginal tax rate would be half that or 14.1% while on Canadian eligible dividend, her marginal tax rate would be a mere 7.6%. Example 2 Eliza lives in Ontario and earns \$50,000 of investment in 2016, comprised of \$10,000 of interest, \$20,000 of realized (gross) capital gains and \$20,000 of Canadian eligible dividends. Assuming only the basic personal amount as well as the applicable dividend tax credit, her total tax bill would be a mere \$1,400 and her average tax rate only 2.8% (\$1,400 / \$50,000). The reason for such a low rate stems primarily from the dividend tax credit, Example 3 Peggy lives in Manitoba and earns \$50,000 of employment, contributes \$5,000 to an RRSP and has \$5,000 of tuition credit amount carryforward from when she was a student. She makes \$1,200 in charitable donations annually. Taking into account her RRSP deduction, the basic personal amount and her tuition and donation credits, her 2016 tax bill would be about \$7,300, resulting in an average tax rate of about 15%. Conclusion We can see from the examples above that, while all three taxpayers had \$50,000 of, their average tax rates ranged from 2.8% (Eliza) to 16.8% (Angelica). We can see that both the type of (e.g. employment, dividends and capital gains) and the opportunity to claim various deductions (e.g. RRSP contribution) and credits (e.g. tuition, donation, etc.) all can have a significant impact on your average tax rate and the tax you ultimately pay. 4

5 Marginal Effective Tax Rate There is a third type of rate that must also be kept in mind for some taxpayers: Marginal Effective Tax Rate (METR). Similar to the marginal tax rate, the METR goes a step further by comparing the amount of tax paid on an additional dollar of, taking into account not only the statutory federal and provincial tax bracket thresholds and rates, but also the potential loss of -tested tax deductions, credits and government benefits. That is, many government benefits, credits and programs are based on net and are substantially or even totally reduced as your gets higher. For instance, both the age credit and the GST/HST credit are tested, as is the Guaranteed Income Supplement (GIS), and Old Age Security (OAS) benefit payments. (See Figure 5.) As increases, these credits and benefits may be reduced or even eliminated altogether. For example, in 2016, the OAS clawback begins when is over approximately \$74,000 and results in the OAS being fully clawed back once reaches approximately \$119,000. The clawback of OAS alone can produce METRs of well over 50%, depending on your and province of residence. As withdrawals from a TFSA (unlike RRSP or RRIF withdrawals) are not considered and do not impact -tested benefits, such as the OAS. The potential for a future OAS clawback can sometimes influence the decision on whether to currently contribute to a TFSA or an RRSP. Similarly, future eligibility for the GIS and Age Credit may also impact such a decision. Figure 5 A Sample of Various Federal Income Tested Benefits & Credits Value Income Threshold Begins Ends Guaranteed Income \$ 9,283 \$ 24 \$ 17,304 Supplement Single 1 Old Age Security \$ 6,846 \$ 73,756 \$119,398 Age credit (federal) \$ 1,069 \$ 35,927 \$ 83,427 GST / HST Credit Single \$ 272 \$ 35,475 \$ 43,765 Figure 5 reflects amounts in effect as at March 23, 2016 A February 2016 C.D. Howe Institute report 2 looked at this issue from the viewpoint of current METRs, rather than future. It defines a participation tax rate (PTR) as the disincentive to participate in the labour market at all. The report reviews the impact of both METR and PTR on participation in the workforce for a secondary earner in a two-parent household. As the report stated, high METRs or PTRs, for a child-caring spouse, are likely to have an impact on incentives to work longer hours, to seek part-time work or to re-enter the workforce leading to fewer paid work hours than people otherwise might choose. At very low levels, METRs can actually be negative, reflecting the subsidy to work generated by the Working Income Tax Benefit (WITB). As grows, the WITB begins to be clawed back, as do other -tested government benefits such as the federal GST/HST credit, and METRs increase dramatically. The Report s author is in favour of programs such as the proposed Quebec provincial tax-shield program where relief would be provided from claw-back in the first year after the increase in paid labour. Finally, it looks as if -tested benefits will continue to be introduced. The 2016 Federal Budget announced a new Canada Child Benefit, starting in July 2016, which will be phased out based on the number of children and adjusted family net. 5

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