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   Eventually when the funds are withdrawn, whether you chose the optimal time or whether you are mandatorily forced to begin withdrawals at age 71, here lies the expectation that your income may be in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.