Final yr, the federal Liberals launched minor cuts to earnings tax ranges for the center class whereas pushing the highest mixed federal/provincial marginal tax fee previous the magic 50% in a number of provinces, together with Ontario, the place the determine is now a whopping 53.53% (together with high-income surtaxes) for these incomes $220,000 a yr. In different phrases, when such a high-earner receives a money bonus on prime of the common wage, these “final” {dollars} might be taxed at 53.53%, as would curiosity earnings in non-registered funding accounts.
Now it’s true that anybody on this common Retired Cash column is effectively conscious that capital beneficial properties and dividends are taxed much less harshly than earned earnings, bonuses or curiosity. In response to this article at TaxTips.ca, in that prime tax bracket the identical individual would pay simply 26.76% on capital beneficial properties, though I used to be shocked to study that the speed on eligible Canadian dividends is a relatively stiff 39.34% (within the highest tax bracket).
I say shocked as a result of most Canadian taxpayers have a fond notion that the tax fee on such dividends is nearer to 25%. It’s in actual fact 25.38% however just for these within the tax bracket of $91,831 to $142,353 (2017 figures).
Luckily – until as some worry the upcoming price range modifications all the principles once more – taxes on capital beneficial properties and dividends are extra merciful for these incomes below $90,000 a yr. And I’m guessing that features lots of semi-retired and retired individuals who now depend on some mixture of pension earnings and funding earnings.
You might have seen tales elsewhere concerning the reality residents of quite a lot of Canadian provinces, together with Ontario and a lot of the western provinces, can earn as much as $50,000 a yr in eligible dividend earnings and pay virtually no tax. That’s true however provided that you consider the essential qualifier: that you don’t have any different main sources of earnings. So for those who’re making good cash as an worker, this technique received’t assist a lot, nor will it drastically assist for those who take pleasure in beneficiant pension advantages. Plus, says Vancouver-based portfolio supervisor Adrian Mastracci of Lycos Asset Administration, you’d need to amass roughly $1 million in a non-registered inventory portfolio to generate $40,000 a yr in eligible dividend earnings (assuming 4% yield), a determine that’s then “grossed up” by 38% in accordance with Ottawa’s bizarrely advanced tax guidelines.
In a household state of affairs the place one partner is the principal wage earner and the opposite is just not employed, the dividend earnings on non-registered investments would usually be attributed again to the wage-earning partner, says Aaron Hector, a licensed monetary planner with Calgary-based Doherty & Bryant Monetary Strategists. Nevertheless, he provides, if their affairs have been structured so {that a} spousal mortgage was in place, then the non-registered funding earnings may very well be taxable to the non-working partner. On this state of affairs, the potential for the “$50,000 tax-free dividend earnings” is there as long as the correct planning is in place.
We’ve talked earlier than right here about “topping as much as bracket” and the “tax-free zone” of roughly $20,000 that consists of the Fundamental Private Quantity, the $2,000 pension credit score and the $7,125 Age Credit score that kicks in at age 65. The latter has been flagged by some pessimistic observers as a doable sufferer of the price range. In that case, it will be a horrible pity as a result of in impact the Age Credit score (which is means-tested) has the impact of constructing Previous Age Safety (OAS) earnings in impact tax-free: you can begin to gather OAS at 65.
Actually in case you are post-employment and might defer pensions and RRSP/RRIF drawdowns in your 60s, the primary $41,000 or so of qualifying dividend earnings qualifies as its personal tax-free zone, or practically so. In response to Tax Suggestions, the candy spot is the primary $41,536 of taxable earnings: At that degree, curiosity is taxed at 20%, capital beneficial properties at 10% and – consider it or not – eligible Canadian dividends are taxed at minus 6.8%. Even non-eligible dividends are taxed at solely plus 6.13%.