Taxes
We rang in 2019 without much fanfare. Canada's economy looks the same: not too hot, but not cold either. Small businesses did well in 2018 despite the scary NAFTA revamp and a year-end stock market correction. The Canadian pipeline debacle continues to threaten the energy sector, and big US auto woes hit Eastern Canada's manufacturing core.
Things improved in January. The stock market crash stopped. The outlook on global trade improved, and interest rates and unemployment remain low across Canada. If you own a small business, you know it's harder than ever to find good people and keep them.
Canadians owe more than ever, and people with mega mortgage payments could be at risk if interest rates continue to rise. The Bank of Canada simulated a real-estate crash and reiterated the low probability of a US-style bank melt-down here.
In other 2018 real estate news, homebuyers with enough cash to get an uninsured mortgage (a down payment of at least 20 percent) faced new rules that test their financial strength. Fears subsided in early 2019, and the big banks lowered their mortgage rates. The ongoing low-rate, cheap money bonanza we're in continues in 2019, a good scenario for businesses who want to borrow to expand.
Unlike interest rates, personal income tax rates continue to grind higher. Let's see what's in store for 2019.
In Canada, which tax bracket am I in?
Tax brackets aim to make taxes fair for everyone by increasing the rate of tax you pay as your income rises. People who earn more pay a progressively higher amount of income tax as their income falls into higher tax brackets.
Do tax brackets work? It depends on who you ask. Most countries on the planet and all member countries of the G20 use them. Opinions about the fairness of our tax system vary greatly. Some people think everyone should pay the same income tax rate instead of hitting higher income earners with tax rates approaching 50 percent.
Dennis Howlett, Executive Director of Canadians for Tax Fairness, penned an article that sums up his thoughts: "Our Tax System Is Riddled With Unfair Loopholes - And It's Getting Worse." Others, including famed billionaire investor Warren Buffet and US Senator Elizabeth Warren, believe the ultra-rich should be paying a lot more income tax.
Senator Warren's plan aims to levy two to three percent yearly on the assets (two percent starting at $50 million, and three percent above $1 billion) of 75,000 ultra-rich families who own as much as the bottom 90 percent of American families combined. The new tax could raise as much as $2.7 trillion over ten years ($270 billion yearly, or roughly five percent of the US federal budget!).
What's my tax bracket and why does it matter?
Tax brackets set income levels taxed at different rates. When people talk about their tax bracket, they mean the highest tax bracket in which they have income.
Your highest tax bracket is also called your marginal tax rate. Why marginal? Because you're taxed at the higher rate on every dollar of marginal (additional) income until you reach the next bracket.
Knowing your marginal tax rate (what bracket you're in) is important. Here's why:
- If you know which tax bracket you're in, you can make better financial decisions
- Large tax deductions from contributions to spousal RRSPs, RESPs, etc., may lower your taxable income significantly. As a result, you might end up in a lower tax bracket, with more income than expected
- If you expect to earn less this year than next year or vice versa, your marginal tax rate helps you decide whether it makes more sense to deduct the contributions in the current year or next year
- On the other hand, a new job or a promotion with a substantial pay raise could put you in a higher bracket and leave you with less income than you thought if you don't use marginal tax rates to make calculations
- Your marginal rate and your spouse's help determine who should claim certain amounts or credits
- Knowing your current and expected future marginal rates can help you decide on the most tax-efficient strategy for withdrawals from retirement savings accounts and how to manage government pensions you're entitled to.
Plan ahead to lower your income tax
Finally, you might have heard this before: "if I earn less, I'll take home more". Rest assured, it's pure fiction and decades old. Earning more will always leave you with more after-tax income, even if your marginal rate goes up. Nobody wants to pay a lot of income tax, that's a fact. And besides the tips above, plenty of legal strategies can help you lower your income tax. Talk to a financial planner or tax specialist for more information.
To model the impact of different tax rates and estimate your federal and provincial tax bill for 2019, give Ernst & Young's 2019 Personal tax calculator a try. Make sure you use the combined federal and provincial brackets when you evaluate financial strategies.
