Think clients know their tax rates? Check again

In the wake of the federal budget, most Canadians don’t know if they will pay more or less tax in 2016, says Jamie Golombek, managing director of Tax and Estate Planning at CIBC’s Wealth Strategies Group.

“When you don’t have a handle on what tax brackets you fit into, you are likely to leave tax savings on the table today or be faced with a higher bill when you retire,” he adds.

Read: How budget 2016 will impact your client’s retirement

In a new report, Golombek explains how income is taxed and the impact of rates on different income levels, so share this information with clients.

A note on high marginal rates

High-income individuals, those making $200,000 or more in taxable income, saw their marginal federal tax rate jump to 33% from 29%. But, they also benefit from the 1.5% tax cut to middle-income earners. “That means the threshold at which the new high-income tax rate will really be felt is when taxable income exceeds about $217,000,” says Golombek.

Read: A look at new personal tax rates

However, with the recent provincial increases to the top marginal tax rate, high-income individuals can be impacted well beyond their tax bills, he adds. “Marginal tax rates now exceed 50% for the highest income earners in six provinces, most notably in New Brunswick, Nova Scotia, Ontario and Quebec,” he adds.

“When marginal tax rates exceed 50%, some taxpayers may choose to work less or retire early. This large tax burden could prompt professionals to relocate and even possibly result in some leaving the workforce altogether.”

Watch your marginal effective tax rate

Depending on clients’ incomes, they could risk losing some income-tested tax deductions, credits and government benefits (such as Old Age Security, the GST/HST credit or age credit) if they aren’t aware of their marginal effective tax rate (METR).

Read: What happens when you don’t account for PFICs

More income-tested benefits, such as the new Canada Child Benefit introduced in the recent federal budget, are also in the works. So, it’s critical to help clients understand their METR as part of their whole financial pictures, says Golombek.

Read: Who will benefit from the new family tax regime?

Be tax-deduction and credit savvy

It’s important for people to consider their average tax rates, which are dependent on the types of income they earn, as well as the deductions and credits they claim.

Golombek suggests clients decrease their average tax rates by looking for tax-favoured investments, such as Canadian dividends and capital gains, and taking advantage of all possible deductions and credits. This includes basic ones such as investment-management fees, maximizing charitable donations and RRSP contributions, and taking advantage of child-related credits and expenses.

Read: Updated: Investment fees–What’s deductible?

“Most investors are aware of the different types of tax-favoured investments, [but] there are also a number of common deductions and tax credits,” says Golombek.

Common tax terms

Your marginal tax rate indicates how much tax you will pay if you were to earn an extra dollar of income.

Your average tax rate indicates the total taxes you pay in relation to your total income.

Your marginal effective tax rate indicates not only how much tax you will pay if you were to earn more money, but also the potential loss of income-tested tax deductions, credits and government benefits, such as Old Age Security, the GST/HST credit, the age credit or the new Canada Child Benefit.