Alberta's top earners - once the envy of Canada's rich - brace for a new tax reality
Alberta's newly introduced personal tax regime for high-income earners means that Alberta will no longer have the lowest marginal tax rate in Canada, but it also raises the question of whether governments are able to collect current year tax increases so late in the year.
Higher-income Canadians living outside of Alberta have always envied the province's flat 10 per cent tax rate, which, when combined with the top federal rate of 29 per cent, produced a combined maximum personal tax rate of 39 per cent - by far, the lowest in Canada. In fact, this rate was a full 11 per cent below the top marginal rate of 50 per cent currently in place in Ontario, Quebec and Nova Scotia and 16 per cent below New Brunswick's eye-popping new rate of 55 per cent for its highest income earners.
But earlier this month, Alberta's new NDP government introduced Bill 2, "An Act to Restore Fairness to Public Revenue," which received its third reading this week. As promised in its throne speech, the government has announced progressive, graduated tax rates for Albertans whose taxable income exceeds $125,000.
Specifically, those with income over $125,000, but under $150,000 will pay 12 per cent provincial tax; those making over $150,000, but less than $200,000 will pay 13 per cent; those making over $200,000, but less than $300,000 will pay 14 per cent; and those earning over $300,000 will pay 15%, resulting in a new, top combined federal-Alberta marginal rate of 44 per cent. These brackets will be indexed starting 2017.
Alberta's top marginal rate will now be the same as in Saskatchewan and Yukon, higher than in British Columbia, the Northwest Territories and Nunavut, but still lower than in the other provinces.
Alberta's increases apply as of October 1, 2015, which effectively means that for 2015, the rates above are prorated by 25 per cent (representing three months), resulting in 2015 effective rates of 10.5 per cent, 10.75 per cent, 11 per cent and 11.25 per cent, respectively. Starting in 2016, the new rates will apply in full.
What's most interesting, and particularly troublesome to many Albertans, is whether the government can actually collect the taxes for 2015. According to a PwC note, "the Tax Collection Agreement (TCA) that governs the collection of Alberta's personal income taxes by the federal government appears to prevent the application of the tax increase for 2015." That's because, to administer tax changes by July 1, 2015, the TCA requires the federal government to have been notified of those changes by April 15, 2015.
According to The Canadian Press, Alberta Finance Minister Joe Ceci said that, "while it's not ideal to introduce tax changes mid-year, it was important to move immediately to make Alberta's fiscal foundation more secure and fair."
The PwC memo says that Alberta's Finance Minister and the federal government have discussed the 2015 rate increase and, "although there is no written agreement, Alberta's Minister believes the rate increase will proceed, starting October 1, 2015."
So how much additional tax will a high-income Albertan pay as a result of the tax increase?
According to calculations prepared by PwC Canada, an Albertan making $200,000 will pay an extra $500 in 2015 and an extra $2,000 starting next year, while someone making $600,000 would pay an additional $5,250 this year and $21,000 in the future.