Been to an investing or tax seminar recently? If so, it's likely that the
presenter, in an attempt at simplification, may have assumed a 50% tax rate when
demonstrating the effect that income taxes can have on investments. But is
anyone even in that tax bracket? In fact, does a 50% bracket even exist?
If you live in Newfoundland and Labrador, and you make more than $118,285,
your marginal tax rate for 2006 is close, at 48.6%. Nova Scotia is next, at
48.3%, followed by Quebec, with a combined federal and provincial top marginal
rate of 48.2%.
But not even those Newfoundlanders earning more than $118,285 annually are
paying close to 50% tax. The reasons are explained through an examination of our
tax brackets and the difference between marginal and average tax rates.
The 2006 federal tax system consists of four tax brackets. The lowest
bracket, for income below $36,378, is 15.25%. For years this rate was 16%, but
was lowered to 15% by the last Liberal government. Earlier this year, the
Conservative government announced that the lowest bracket would increase to
15.25% this year and 15.5% in 2007.
There are two middle-income brackets for federal taxes: the first, covering
income from $36,378 to $72,756, has a tax rate of 22%; the second, covering
income from $72,756 up to $118,285, is subject to a rate of 26%. The top
bracket, for annual income of $118,285-plus, is taxed at 29%.
On top of the federal rates, each province and territory has its own set of
brackets and rates (except Alberta, which imposes a flat 10% provincial tax
irrespective of income level). These vary wildly by province or territory.
For example, British Columbia has five tax brackets, including three
middle-income brackets. Manitoba, on the other hand, has only three tax
brackets, including one middle-income bracket.
The tax brackets are only part of the equation. Then there's the matter of
marginal tax rates versus average tax rates. Technically, your marginal tax rate
is the amount of tax you pay on each additional ("marginal") dollar of income
above a certain level. Your average tax rate is calculated by dividing your
total tax liability by your total income.
For most middle-income Canadians, the average tax rate is significantly lower
than their marginal tax rate. For example, as the chart above shows, Marie, a
middle-income Quebecer who earns $60,000 annually, may be in a 42.37% marginal
tax bracket but her average tax rate is substantially lower at 28.15%.
So, the next time you hear someone bemoaning the "50% tax bracket," chances
are they don't have quite that much to complain about.