Income Type & Income Tax for 2016

Income Type & Income Tax for 2016

Executive Summary

We have always been focused on what ends up in our pockets, after fees and after tax.  With increasing disclosure rules on fees, it becomes easier and easier for clients to understand the implications of income tax.

In registered accounts, RRSPs, RESPs, for example, it is the risk/reward balance free of tax that is considered, because no tax is levied on income when it is earned, and there is no difference between income type when it is withdrawn from those accounts.  The rules and differences among these accounts become more complicated later, when funds are withdrawn, but not while it is earned.

For invested assets held outside registered accounts, the tax differences can be substantial.

High income earners (over $200,000/year) will pay about 53% marginal tax on interest income, 27% on capital gains, and eligible dividends will pay approximately 29%.

 

What You Need To Know

Capital Gains

Dividends (Eligible)

Interest

Income amount

$1,000

$1,000

$1,000

Exempt from tax

50%

n/a

n/a

Taxable Income

$500

$1,000

$1,000

Dividend “gross up”

n/a

38%

n/a

True Taxable Income

$500

$1,380

$1,000

Federal Dividend TaxCredit @ 15.0198%

n/a

($207)

n/a

Provincial DividendTax Credit @ 10% (est. varies by province)

n/a

($138)

n/a

Federal Income Tax @ highest marginal rate of 33%

$165

$455

$330

Provincial IncomeTax @ 20%

(varies by province)

$100

$179

$200

Total Tax

$265

$289

$530

Tax Rate

26.5%

28.9%

53%

 

 

The highest marginal tax rate can vary dramatically by income type and by province for 2016.

Province

Capital Gains

Eligible Dividends

Interest

British Columbia

23.85%

31.30%

47.70%

Alberta

24.00%

31.71%

48.00%

Saskatchewan

24.00%

30.33%

48.00%

Manitoba

25.20%

37.78%

50.40%

Ontario

26.76%

39.34%

53.53%

Quebec

26.65%

39.83%

53.31%

New Brunswick

29.38%

43.79%

58.75%

Nova Scotia

27.00%

41.58%

54.00%

Prince Edward Island

25.69%

34.22%

51.37%

Newfoundland

24.15%

38.47%

48.30%

Source: KPMG Canada

 

Bottom Line

When planning taxable income for investments, the ‘after tax’ number is really what matters, so along with risk tolerance and investment goals, plan for CRA’s portion of your earnings.

 

Chat soon,

 

Jeff Devlin, CFP

Elementus Wealth Management Inc.

 

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