N.B. at front in lowering top tax rates
Earlier this week, New Brunswick became the first province to drop its top provincial tax rate for high income earners, likely in direct response to the Liberals' 2016 tax hike for the top one per cent. Now the question remains: Will other provinces follow suit?
The Liberals campaigned on a promise to cut the middle income tax bracket to 20.5 per cent from 22 per cent, which applies to taxable annual income between $45,282 and $90,563 in 2016. To help pay for this, they introduced a new, high income tax bracket of 33 per cent (up from 29 per cent) for individuals earning more than $200,000 annually. These tax changes were effective Jan. 1, 2016.
When combined with existing provincial top tax rates, these highest-income earners' total combined federal/ provincial marginal tax rate for 2016 currently exceeds 50 per cent in more than half the provinces.
Prior to Monday's budget announcement, New Brunswick's top rate for 2016 would have been a whopping 58.75 per cent, making it the highest taxed province in Canada. The budget eliminated New Brunswick's top rate of 25.75 per cent on taxable incomes over $250,000 and dropped its rate on taxable incomes over $150,000 to 20.3 per cent from 21 per cent, retroactive to Jan. 1, 2016. This now makes New Brunswick's top combined federal/provincial marginal tax rate equal to 53.3 per cent and puts its eastern neighbour Nova Scotia, with a top rate of 54 per cent, in the coveted (not!) position of the highest-taxed province in Canada for 2016.
New Brunswick's move didn't come as a complete surprise to tax professionals who felt that the province needed to do something to remain competitive and retain top talent, who often earn taxable incomes in excess of $200,000.
Scott Greer, a tax partner with accounting giant PWC in Saint John, welcomes the province's rate cut and hopes it will help keep such talent from moving.
"People paying that tax rate tend to be fairly mobile, like doctors, and may move to another province or the U.S, where the ax rate is lower. Hopefully, the reduction was done in time before people solidified plans to move," Greer says.
The question, as we get into provincial budget season, is whether other provinces will follow New Brunswick's lead and drop their top marginal rates, especially for the remaining five provinces whose top combined rates exceed 50 per cent.
There is a mounting pile of academic studies that look at how high the tax rate can go before it becomes a psychological barrier to work. The 1966 Carter Commission felt that once the top rate exceeded 50 per cent, it threatened productive effort.
New Brunswick has taken the lead in reducing their top rate, albeit not to below 50 per cent. Will other provinces follow suit? Stay tuned.