Justin Trudeau’s Liberal government brought in tax cuts that were supposed to help the middle class and took effect on Jan 1st 2016. Will you benefit from those tax cuts or be left behind? That all depends on how much you make and where you live.
If you are making less than $45,282 a year, you won’t notice any difference on your paycheck because the cuts are targeted for people that make between $45,282 and $90,563 but people that make between $90,563 and $200,000 a year will benefit even more because they benefit from cuts in taxes in two tax brackets. Here in Alberta, people with high incomes of over $300,000 will pay a lot more because of increases to the federal tax rate on high incomes, and there was also an increase to the provincial tax rate on incomes over $300,000. So Those people will pay 7.75% more than they did last year.
If you’re an employee, you may have already received your first paycheque of 2016. Assuming you didn’t get a raise this year, you may be wondering why the amount you received this payday was different than the amount you received in 2015.
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There are number of factors that affect how much actual cash you get to keep from your paycheque, the most significant ones being the amount of income taxes withheld at source by your employer as well as CPP/QPP contributions and EI premiums.
As we know, Trudeau’s middle-income tax cuts (although not yet passed) took effect on Jan. 1 and their impact is already built into the payroll deduction tables your employer uses to calculate the amount of tax that must be withheld from your pay. The middle-income tax cut applies to 2016 taxable annual income between $45,282 and $90,563 and the rate is now 20.5 per cent, down from 22 per cent in 2015. This means affected employees should experience at least a slight boost to their paycheque, once they have maxed out on their CPP and EI withholdings for 2016, whose rates remain unchanged.
Canada’s top income earners, on the other hand, now face a new, top bracket of 33 per cent, which applies to anyone earning more than $200,000 annually. Last year’s top bracket was 29 per cent and was reached once income hit $138,586 in 2015. For 2016, the 29 per cent rate becomes the second highest bracket and applies to taxable income between $140,388 and $200,000.
To illustrate, let’s take a look at three employees, Angelica, Eliza and Peggy, whose employment income falls into the lowest, middle and top federal tax brackets and see what their take home pay looks like for their first payroll of 2016 versus what it would have looked like a year ago. For simplicity, we will assume that all three employees live in Ontario, where provincial tax rates for 2016 haven’t changed since last year.
Angelica earns $42,000 annually and as a result, does not benefit from the middle income tax cut. Assuming she is paid semi-monthly, on a gross pay of $1,750, her net take-home pay — after income tax, CPP and EI — would be $1,390, which is basically the same as it was in 2015 ($1,387), the slight difference owing to the indexation of the federal and provincial tax brackets for 2016.
Eliza’s annual income is $90,000 and as a result, she will fully benefit from the middle-income tax cut. Semi-monthly, her gross pay works out to $3,750, and she will net $2,640 after taxes, CPP and EI. This is up from $2,602 in 2015.
Finally, Peggy’s annual income is $240,000. While she will get the benefit of the middle income tax cut, her tax savings will be fully eroded by the extra four per cent tax she will pay on her income above $200,000. Assuming a semi-monthly gross payroll of $10,000, she will net $5,482 this paycheque, which is slightly less than the $5,507 she would have received in 2015.
For high-income earners living in Alberta, whose tax rates have increased dramatically since last year, the impact on their take home pay this month will be much more severe as Alberta’s top federal/provincial combined marginal rate went from 40.25 per cent in 2015 to 48 per cent in 2016. Ouch!
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Wealth Advisory Services in Toronto.