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Tax changes coming to Canada

While wealthy Canadians get a new top rate, lower-income Canadians will see a cut.

Jess Morgan 28 October, 2015 | 5:00PM Rudy Luukko
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Rudy Luukko: Depending on how much money you make, income tax is going to, under the Liberals, either become more progressive or more punitive. Right now there are four tax brackets: 15%, 22%, 26% and the top rate of 29%.

Now the Liberals are going to make two key changes. One is that that 22% tax bracket is going to be cut by a percentage point and a half, bringing it to 20.5%. And the second and, I suppose, more controversial one is that there is going to be a whole new top tax bracket introduced: 33%.

What is the rationale for a new top tax bracket?

As Justin Trudeau repeatedly said on the campaign trail, they want the wealthiest taxpayers to dig a little deeper, pay more, so that the middle income taxpayer can pay somewhat less. And so what it amounts to, really, is redistribution within the income tax system, since overall these changes are going to be pretty much revenue-neutral.

How many Canadians will be affected by these changes?

The modest tax cut that’s going to affect many millions of Canadians because it affects taxable incomes between roughly $45,000 and $90,000, the tax hike is going to be, while steeper, it's going to be much more selective. It's going to affect taxable incomes of more than $200,000 and so, according to the Liberals, that’s going to affect only about one out of every 100 taxpayers.

How should Canadians adapt their financial plans when these tax changes come in?

Well, let's first look at the middle-income tax cut. The maximum benefit is going to be tax savings of approximately $670 a year. So do the math, that’s about a cup of coffee a day, roughly, and so it's not going to be a game changer for financial planning. Now as for the wealthiest taxpayers, there are no new tax breaks, and some are even being taken away, like family income splitting, primarily benefitting the wealthier taxpayers.

So it really comes down to doing what you can under the rules that are allowed and doing things such as maximizing the tax efficiency of your investment portfolio or, alternatively, it could even be a lifestyle decision to decide to work less and make less because of it not being worth it, because the tax rates are so high.

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About Author

Jess Morgan

Jess Morgan  Jess Morgan is the associate editor of Morningstar Canada’s website. She began her career as a television producer and freelance writer, often making appearances on TV and radio as a commentator on politics and culture. She holds a BA in communications from the University of Winnipeg and a diploma in Creative Communications from Red River College.

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