Income Type & Income Tax for 2016
Executive Summary
We have always been focused on what ends up in our pockets, after fees and after tax. With increasing disclosure rules on fees, it becomes easier and easier for clients to understand the implications of income tax.
In registered accounts, RRSPs, RESPs, for example, it is the risk/reward balance free of tax that is considered, because no tax is levied on income when it is earned, and there is no difference between income type when it is withdrawn from those accounts. The rules and differences among these accounts become more complicated later, when funds are withdrawn, but not while it is earned.
For invested assets held outside registered accounts, the tax differences can be substantial.
High income earners (over $200,000/year) will pay about 53% marginal tax on interest income, 27% on capital gains, and eligible dividends will pay approximately 29%.
What You Need To Know
Capital Gains | Dividends (Eligible) | Interest | |
| Income amount | $1,000 | $1,000 | $1,000 |
| Exempt from tax | 50% | n/a | n/a |
| Taxable Income | $500 | $1,000 | $1,000 |
| Dividend “gross up” | n/a | 38% | n/a |
| True Taxable Income | $500 | $1,380 | $1,000 |
| Federal Dividend TaxCredit @ 15.0198% | n/a | ($207) | n/a |
| Provincial DividendTax Credit @ 10% (est. varies by province) | n/a | ($138) | n/a |
| Federal Income Tax @ highest marginal rate of 33% | $165 | $455 | $330 |
| Provincial IncomeTax @ 20% (varies by province) | $100 | $179 | $200 |
| Total Tax | $265 | $289 | $530 |
| Tax Rate | 26.5% | 28.9% | 53% |
The highest marginal tax rate can vary dramatically by income type and by province for 2016.
| Province | Capital Gains | Eligible Dividends | Interest |
| British Columbia | 23.85% | 31.30% | 47.70% |
| Alberta | 24.00% | 31.71% | 48.00% |
| Saskatchewan | 24.00% | 30.33% | 48.00% |
| Manitoba | 25.20% | 37.78% | 50.40% |
| Ontario | 26.76% | 39.34% | 53.53% |
| Quebec | 26.65% | 39.83% | 53.31% |
| New Brunswick | 29.38% | 43.79% | 58.75% |
| Nova Scotia | 27.00% | 41.58% | 54.00% |
| Prince Edward Island | 25.69% | 34.22% | 51.37% |
| Newfoundland | 24.15% | 38.47% | 48.30% |
Source: KPMG Canada
Bottom Line
When planning taxable income for investments, the ‘after tax’ number is really what matters, so along with risk tolerance and investment goals, plan for CRA’s portion of your earnings.
Chat soon,
Jeff Devlin, CFP (2010-2022)
Elementus Wealth Management Inc.