|
|
Archived
Tax Columns
Click on the headline to view article.
|
Moncton Times & Transcript ~ Tax Help Plus ~ Marginal Tax Rates ~ October 3, 2006 - 29 Oct 2006 by TaxHelp
|
As the calendar flips to October, it becomes a time of eager anticipation. Thanksgiving, Halloween, Remembrance Day and Christmas all seem to pronounce that the end of the year is in sight. The fourth quarter of the year is also a time that many people sit down and review their investments. As a result, part of the financial strategy should be to see if there is any tweaking to be done before the tax year ends.
While investing is not often a very exciting story, there is a way some people participate in order to maximize their returns. Not every dollar of income you earn is taxed equally. In Canada, we have a graduated or progressive tax system, in which higher levels of income are taxed at higher rates.
For 2006, the federal tax rate begins at 15.25 per cent and is applied to taxable income on the first $36,378. A 22 per cent rate is applied to taxable income on the next $36,378. A third rate of 26 per cent is applied to income over $72,756 and less than $118,285 with the balance taxed at 29 per cent. Thus, an individual with a taxable income of $50,000 has a bill of $8,544 before any credits are applied ($5,547 on the first $36,378 and $2,996 on the remaining $13,622). The basic personal amount of $8,839 plus CPP and EI credits lowers the tax bill to $6,793.
To this figure we must add the provincial taxes. New Brunswick does not follow the federal government's numbers and thresholds. The first $33,450 is taxed at 9.68 per cent. The next $33,452 is taxed at 14.82 per cent. For those with even greater incomes, the next $41,866 is taxed at 16.52 per cent, and income in excess of this is taxed at 17.84 per cent. In our example, the first $33,450 is taxed at 9.68 per cent while the next $16, 550 is taxed at 14.82 per cent for a total of $5,690. The provincial basic amount is $8,061, and with credits reduces the bill to $4,654.
While this individual appears to have an overall taxation rate of 22.9 per cent, it is important to consider their marginal tax rate - in this instance it's almost 37 per cent. For tax-planning purposes, we usually refer to the marginal tax rate, which is defined as the rate of tax payable on the last dollar earned.
This number tells you how much money you get to keep if you make an extra dollar, or how much you save in taxes by reducing your taxable income a specified amount. It is the marginal rate that determines the value of any additional income or deduction.
Having said that, there is a further factor complicating the issue: not all types of income are treated the same way for tax purposes. A dollar's worth of interest income, for example, is taxed differently than a dollar's worth of dividends which is taxed differently from a dollar's worth of capital gains.
Interest income attracts the highest tax, no matter what tax bracket you are in. For the individual earning $50,000, bank interest of $1,000 attracts a combined federal-provincial tax bill of $368 dollars.
Dividends as investment income are more attractive. The reason for this is that dividends are paid out of a corporation's after-tax income. Because the corporation has already paid tax on the income, the investor receives a tax credit to compensate for the tax already paid.
In our example $1,000 of actual dividends generate a tax bill of $247 - a savings of over 13 per cent.
There are new legislative changes that are going to make eligible dividends even more attractive. While the provincial dividend tax credit has yet to be announced, $50,000 of enhanced dividend income is only going to attract about $250 of federal tax! The new government in Fredericton have yet to announce their changes but we’re hopeful that they will correct the previous drastic dividend tax credit cut and restore it to an amount relative to the federal rate.
Capital gains attract less tax than both dividends and interest income because only half of the capital gain is taxable.
This means that for each dollar of capital gains, 50 cents is earned tax-free. In this case $1,000 of capital gains ends up with a tax bill of only $184, a savings of almost 20 per cent compared to interest.
The astute investor who can marry both RRSP's, which while being deductible at the marginal tax rate are fully taxable upon receipt, and non-registered investments that take advantage of these types of income, will get to truly maximize their returns.
Roger Haineault is with Help 4 Taxes. His column "Tax Help Plus ..." appears each Tuesday. For questions, comments or column suggestions he can be reached by calling 855-HELP (4357) or by emailing roger@help4taxes.ca
|
|
|
|
|
