Know your rates before you make any tax decisions or risk
paying too much
TORONTO, April 11, 2016 /CNW/ - CIBC (TSX: CM)
(NYSE: CM) -- With a break for middle-income earners and an
increase for the highest-earners, most Canadians don't know if they
will pay more or less in 2016, says Jamie
Golombek, Managing Director, Tax and Estate Planning, at
CIBC's Wealth Strategies Group.
"There's been much discussion about tax rates this year, but
most Canadians have no idea what it means to them and if it should
change their retirement savings plans," says Mr. Golombek. "When
you don't have a handle on what tax brackets you fit into, you are
likely to leave tax savings on the table today or be faced with a
higher tax bill when you retire. It is critical that people get a
better understanding of the recent changes because last year's
retirement blueprint may leave you short."
In his new report, It's 2016 – Do You Know What Your Tax Rate
Is?, Mr. Golombek explains how your income is taxed and the
impact of rates on different income levels.
Understand the lingo
- Your marginal tax rate indicates how much tax you will
pay if you were to earn an extra dollar of income.
- Your average tax rate indicates the total taxes you pay
in relation to your total income.
- Your marginal effective tax rate (METR) indicates not
only how much tax you will pay if you were to earn more money, but
also the potential loss of income-tested tax deductions, credits
and government benefits, such as Old Age Security, the GST/HST
credit, the age credit or the new Canada Child Benefit.
High marginal rates may spur early retirement or
relocation
High-income individuals, those making $200,000+ in taxable
income, saw their marginal federal tax rate jump to 33 per cent
from 29 per cent. But, they also benefit from the 1.5 per cent tax
cut to middle-income earners because Canadians pay taxes at
graduated rates. "That means the threshold at which the new
high-income tax rate will really be felt is when taxable income
exceeds about $217,000," says Mr.
Golombek.
However, add recent provincial increases to the top marginal tax
rate and high-income individuals can be impacted well beyond their
tax bill, he adds.
"Marginal tax rates now exceed 50 per cent for the highest
income earners in six provinces, most notably in New Brunswick, Nova
Scotia, Ontario and
Quebec," says Mr. Golombek. "When
marginal tax rates exceed 50 per cent, some taxpayers may choose to
work less or retire early. This large tax burden could prompt
professionals to relocate and even possibly result in some leaving
the workforce altogether."
Your marginal effective tax rate may be higher than you
think
Depending on your income, you could risk losing some
income-tested tax deductions, credits and government benefits, such
as Old Age Security, GST/HST credit, or age credit. This can
increase your overall liability to the government.
More income-tested benefits, such as the new Canada Child
Benefit introduced in the recent federal budget, are likely in the
works, which makes it critical to look at your METR as part of your
whole financial picture, he says.
Be tax-deduction and credit savvy
It's also important to consider your average tax rate, which is
dependent on the type of income you earn, as well as the deductions
and credits you claim.
Mr. Golombek suggests that you can decrease your average tax
rate by looking for tax-favoured investments, such as Canadian
dividends and capital gains, and taking advantage of all possible
deductions and credits, including basic ones such as
investment-management fees, maximizing charitable donations and
RRSP contributions, and taking advantage of child-related credits
and expenses.
"While most investors are aware of the different types of
tax-favoured investments, there are also a number of common
deductions and tax credits to take advantage of," says Mr.
Golombek. "Working with a financial advisor can help you determine
which investments can benefit you most, and a tax professional can
provide guidance on deductions and credits."
About CIBC
CIBC is a leading Canadian-based global financial institution
with 11 million personal banking and business clients. Through our
three major business units – Retail and Business Banking, Wealth
Management and Capital Markets – CIBC offers a full range of
products and services through its comprehensive electronic banking
network, branches and offices across Canada with offices in the United States and around the world. You
can find other news releases and information about CIBC on our
corporate website at www.cibc.com/ca/media-centre/.
SOURCE Canadian Imperial Bank of Commerce