It is very important to have a basic understanding of how the marginal tax rate system works in Canada. I am not an accountant and do not profess to know everything about taxes so I sought the help of Terence Wong, Senior Tax Manager at KPMG in Edmonton to help us understand the tax brackets in Alberta.
Wong says, “One of the most important basic fundamentals in tax planning is to understand how your taxes are calculated and knowing which tax bracket you are in. The recent budget has addressed some of the ongoing concerns about Canadians paying too much tax. For the first time in a long time we have seen significant proposals for lower taxes in Canada and Alberta.”
- Bracket adjustments. The Federal government has increased the threshold for each income tax bracket. The upper limit for the low-income bracket is now $30,004, up from $29,591. The upper limit for the mid-income bracket is now $60,009, up from $59,180. This adjustment alone is worth about $75 to a low-income family and about $350 to a middle income family. Additional changes for the low-income bracket include the increase in the Basic Exemption. The amount of tax-free money everyone can earn in Canada goes from $7,131 to $7,231.
- The middle income bracket. Canadians earning between $30,004 and $60,009 per year of income will pay tax at a marginal rate of 36% in 2000 as oppose to 37% last year. Most of this reduction is the result of the Federal reduction of the tax rate. With the reduction of the Federal middle income tax rate, middle income Albertans no longer benefit from Alberta's new proposed flat-tax system. In light of this, Stockwell Day has announced that he may make some further amendments to his flat-tax proposal.
- The high income bracket. The biggest reduction in tax rates can be found in the high-income bracket as a result of the elimination of the federal and provincial surtax. The proposed Alberta flat-tax also has a significant impact for high-income earners. Over time, the marginal tax rate high income Albertans will be 41% instead of the current 44%.
Overall, Wong thinks the tax reductions were significant but is disappointed at the reluctance of the government in addressing debt reduction: “Everything we hear about is deficit control, but we forget about debt reduction. 40% of our nation's income goes to debt servicing. Imagine, if we could reduce the debt, significantly more money will be free up for social spending in the future.”
Knowing which tax bracket you are in, sets the foundation for financial, investment, and estate decisions. Not matter what stage of life you are in, you must take the time to understand the implication of the marginal tax system in Canada. Every deduction, deferral and income splitting strategy is premised on this information. Next week we will talk about tax savings strategies.
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