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Marginal Tax Rates

By Evelyn Jacks

A taxpayer's MTR (Marginal Tax Rate) is a useful tool in measuring tax-efficiency of income sources. It will tell you how much tax you'll pay on the next dollar you plan to earn, while measuring the effect of that income on your eligibility for tax credits and social benefits delivered through the tax system. To compute it, you need to understand that your income sources will be classified into several broad categories for tax purposes. For example:

  1. Ordinary income: is fully taxable and includes income from employment, pensions, and interest.
  2. Income from self-employment: is reported on a net basis - what's�left after revenues are reduced by allowable deductions.
  3. Capital gains: are reported upon the disposition (sale or transfer) of an asset. Only half those gains, net of losses, are reported on the return. Sometimes, gains can be avoided when certain properties are donated to charity.
  4. Dividends are the after-tax distribution of profits from private or public corporations to shareholders. Reporting them involves an integration of the corporate and personal tax systems, the end result of which is a preferential tax rate.
These income sources may also vary by province.

Image showing the Federal Tax Rates for 2009 in Canada Spacer

It's important to keep on top of these marginal tax rates so you can easily see the advantages of earning a variety of different income sources which will strategically average down the taxes you pay.

A quick way to determine the MTR for ordinary income is to add the federal tax rate and the provincial tax rate for your current tax bracket. However, this method does not take into account "clawback zones", or things like provincial surtaxes.

  • A clawback refers to a reduction of a refundable or non-refundable tax credit or other social benefit because the taxpayer's income has risen above a certain income level. This is essentially a tax on the middle class.
  • A surtax is a tax on a tax. This will sometimes apply when income has risen to a certain level.it's a tax on the wealthy.

It is therefore more insightful to understand your MTR as it relates to both your tax bracket and the clawback of benefits, surtaxes, and provincial variations you are subject to. This generally requires the help of tax software or a tax accountant who can prepare the calculations for you.

The MTR is therefore an effective tool in determining whether it's worthwhile for you to earn more of the same type of income or consider increasing your wealth - and your eligibility for tax benefits - with �different tax-preferred investments, like a contribution to an RRSP (Registered Retirement Savings Plan).

RRSPs, for example, will reduce your Net Income, the figure used to determine the size of clawbacks to tax credits and social benefits. �Understanding the impact of a contribution to an RRSP on your tax filing results will allow you to do some tax planning to build real wealth. To show you how effective this can be, consider Lance, an Ontario father whose MTR is 44%.

By contributing $100 to his RRSP Lance's tax practitioner computes a tax benefit of $44. His refund would increase by $40 and in addition, his family's Child Tax Benefit would increase by $4.

In other words, Lance gets a 44% return on every dollar invested in his RRSP by way of reduced taxes and increased benefits - that's before taking into account the tax-sheltered compounding of investment earnings within the RRSP. That's a great return on your investment, by any standards.

So the big picture is this: know your marginal tax rate on the next dollars you earn so you can make choices about your income sources and tax-preferred investments to get the after tax results you want.

Effective Tax Rates

Do you know how much tax you actually paid last year? What percentage of your total income did you give up? If you don't know, dig out your�tax return and look at Line 435 (Taxes Payable) and calculate your effective rate of tax on your total income. Divide Taxes Payable (line 435) by Total Income (line 150). That gives you your actual rate of tax on total income.

That's what ultimately counts-the money that left your pocket. Will your effective tax rate increase or decrease this year? What can you do to reduce the actual taxes you pay on your total taxable income? Are you claiming all the deductions and credits you are entitled to? You need to understand the basic components of the tax return to ask better questions and take control of actual tax outcomes.


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Sure, it's difficult to be an expert at filing your income tax return – something you do only once a year – but once again Canada's most trusted tax author, Evelyn Jacks has come to the rescue with over 200 quick and easy Essential Tax Facts you need to know to get the job done and to your best advantage in 2011 and beyond. Click here to order the book.



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