As we prepare to make our RRSP contribution this RRSP season, it is important to understand the personal marginal tax rates in Canada. I went to Jim Gillespie of Gillespie Farrell Chartered Accountants for the details (all tax rates are Alberta and Federal Combined Tax Rates).
For the year 2000
|$7,600 to $30,003||25.14%|
|$30,004 to $60,008||36.50%|
|$60,009 and up||43.00%|
For the year 2001
|$7,700 to $30,753||23.21%|
|$30,754 to $61,508||32.00%|
|$61,509 to $100,000||36.00%|
|$100,000 and up||39.00%|
Some important changes
As you can see, there are some very important changes from 2000 to 2001:
- Tax rates have dropped all across the board. This is great news and the even better news is this trend is likely to continue as long as governments keep their fiscal policies in good standing.
- Tax bracket levels have increased. In last year's budget, Paul Martin re-introduced indexation of the tax bracket to eliminate the problem of tax bracket creep.
- Introduction of a new marginal tax rate. Any individuals earning over $100,000 will be part of the newest marginal tax rate. The good news in Alberta is it is still below 40%.
Why is this important to the RRSP?
When you make a contribution to an RRSP, you will receive a tax deduction in an amount dependent on your marginal tax rate. For example, If I have an income of $25,000 and I invest one dollar into an RRSP, I will have 25 cents in tax savings. That translates to a good return on investment. If my partner Tom, has an income of $35,000 he is in the middle tax bracket and he will save 36.5 cents on the same dollar contribution. Finally if my other partner Grant earned an income of $65,000, he would have an even greater tax saving even though we all contributed the same amount into an RRSP.
The RRSP is one of the best tax deductions for Canadians. It is important to understand the marginal tax rate system in Canada to know how much of a benefit you will receive through RRSP investing.
This is the year to catch up on RRSPs
Many Canadians have considerable amounts of unused contribution room because they have not maximized their RRSPs in the past. Any contribution room not used in the past can be carried forward into the future. With falling tax rates in Canada, the good news is we will pay less taxes. Unfortunately, lower tax rates makes the RRSP slightly less attractive. For example, in 2001, the same dollar contribution will have slightly lower tax savings in the range of 2% to 7% less, depending on your marginal tax rate.
In many cases, it will be to your advantage to ‘catch-up' on your RRSPs for the 2000 tax year. You have until March 1st to make the contribution and be able to apply the deduction to the 2000 tax year.
Don't forget about tax deferred growth
Without question, the RRSP is very important not only for tax savings, but also because it is the most important vehicle for retirement planning. With fewer pension plans and pressure on government benefits, the RRSP is the best way to control your retirement future. One of the long-term benefits we often forget about is that of tax deferred growth. Any interest, dividends or capital gains inside an RRSP grows tax-free until you take the money out of the RRSP.
In summary, investing in RRSPs can be one of the best investments you will ever make. However, it is just important to know why. Understanding the marginal tax rate system in Canada is your first step to understanding the benefits of the RRSP.