They say two things in life are certain: death and taxes. The goal for our clients is to help them minimize the taxes they pay over their lifetime. We map out a plan with our clients to help achieve this.
Sometimes this strategy may require paying a bit more tax today to avoid paying a lot of future taxes. It’s all too easy to focus on the tax year at hand and minimize those taxes; however, taking a step back and looking at the bigger picture of the taxes you will pay over your lifetime can be eye-opening.
Although it may seem counter-intuitive to voluntarily pay more tax today, by doing so, you can minimize otherwise harsh levels of taxation on death. To do so involves taking advantage of more tax brackets today, to avoid having your estate be in the highest marginal tax bracket on your passing.
It’s helpful to have an understanding of the tax rates and brackets, as well as the difference between your marginal tax rate and your effective tax rate (also known as your average tax rate).
Canadian Federal tax brackets and rates
Canada has a progressive tax system, which means that the greater a taxpayer’s income is, the greater the share of their income they have to pay. This is achieved by having multiple tax brackets.
Federally, there are five different tax brackets and rates. In 2022, the first federal tax bracket covers income up to $50,197 (2021 - $49,020). The last tax bracket in 2022 is for all income over $221,708 (2021 - $216,512).
As you can see, the tax brackets are indexed for inflation annually, similar to other personal income tax and benefit amounts. The federal tax brackets for 2022 are as follows:
|
2022 federal tax rate |
2022 tax bracket |
|---|---|
|
15.00 per cent on the first $50,197 of taxable income |
$0 - $50,197 |
|
20.50 per cent on the next $50,195 of taxable income |
$50,198 - $100,392 |
|
26.00 per cent on the next $55,233 of taxable income |
$100,393 - $155,625 |
|
29.00 per cent on the next $66,083 of taxable income |
$155,626 - $221,708 |
|
33.00 per cent of taxable income over $221,708 |
$221,709 and over |
British Columbia tax brackets and rates
British Columbia has the most progressive tax system with seven different tax brackets with the highest marginal tax bracket starting at income over $227,091 for 2022 (2021 - $222,421).
While B.C. boasts the most tax brackets, it also has the third-highest marginal tax bracket in the country. The combined federal and B.C. top tax bracket is 53.50 per cent. This is surpassed only by Ontario at 53.53 per cent and Nova Scotia at 54.00 per cent. Similar to the federal tax brackets, all provincial tax brackets are also indexed to inflation.
The 2022 provincial tax brackets for B.C. are as follows:
|
2022 B.C. provincial tax rate |
2022 B.C. provincial tax bracket |
|---|---|
|
5.06 per cent on the first $43,070 of taxable income |
$0 - $43,070 |
|
7.70 per cent on the next $43,071 of taxable income |
$43,071 - $86,141 |
|
10.50 per cent on the next $12,760 of taxable income |
$86,142 - $98,901 |
|
12.29 per cent on the next $21,193 of taxable income |
$98,902 - $120,094 |
|
14.70 per cent on the next $42,738 of taxable income |
$120,095 - $162,832 |
|
16.80 per cent on the next $64,259 of taxable income |
$162,833 - $227,091 |
|
20.50 per cent of taxable income over $227,091 |
$227,092 and over |
Combining the tax brackets
|
2022 combined federal and B.C. tax rate |
2022 combined federal and B.C. tax bracket |
|---|---|
|
20.06 per cent on the first $43,070 of taxable income |
$0 - $43,070 |
|
22.70 per cent on the next $7,127 of taxable income |
$43,071 - $50,197 |
|
28.20 per cent on the next $35,944 of taxable income |
$50,198 - $86,141 |
|
31.00 per cent on the next $12,760 of taxable income |
$86,142 - $98,901 |
|
32.79 per cent on the next $1,491 of taxable income |
$98,902 - $100,392 |
|
38.29 per cent on the next $19,702 of taxable income |
$100,393 - $120,094 |
|
40.70 per cent on the next $35,531 of taxable income |
$120,095 - $155,625 |
|
44.08 per cent on the next $7,207 of taxable income |
$155,626 - $162,832 |
|
46.18 per cent on the next $58,876 of taxable income |
$162,833 - $221,708 |
|
49.80 per cent on the next $5,383 of taxable income |
$221,709 - $227,091 |
|
53.50 per cent of taxable income over $227,092 |
$227,092 and over |
Using the above tax bracket tables for reference, we can now illustrate marginal tax rates and effective tax rates. Your marginal tax rate is how much tax you will be paying on one extra dollar of income. Your effective tax rate is the percentage of tax you are paying on average for your given level of income. Let’s look at Mr. Jones to illustrate.
Mr. Jones is 75 years old. He has $1 million in investable assets with $800,000 in a Registered Retirement Income Fund (RRIF), $150,000 in a Tax-Free Savings Account (TFSA), and $50,000 in a non-registered account to meet his monthly cash flow needs. He earns pension income, investment income, and Registered Retirement Income Fund income.
Annually, he tries to keep his income under the Old Age Security (OAS) repayment threshold, which is $81,761 for 2022. Mr. Jones’s spouse passed away several years ago and they had two children to whom his estate will be split evenly. Mr. Jones projects that his 2022 income will be $75,000, which is a similar level to 2021.
Looking at the above tax table, this puts Mr. Jones in the 28.20 per cent range for income between $50,198 and $86,141. This is his marginal tax rate. For every additional dollar Mr. Jones earns over $75,000 up to $86,141, he will be taxed 28.20 per cent.
Mr. Jones’s average tax rate is calculated as his total tax payable, divided by his total income. Let’s calculate that: (20.06 per cent on the first $43,070 = $8,640) + (22.70 per cent on the next $7,127 = $1,618) + (28.20 per cent on $24,803 ($75,000 - $7,127 - $43,070) = $6,994) = a total of $17,252 less federal basic personal exemption $2,160 ($14,398 x 15 per cent) less B.C. basic personal exemption $572 ($11,302 x 5.06 per cent) = $14,520 / $75,000 = 19.36 per cent average tax rate.
As there are 11 tax brackets when combining federal and B.C. tax rates, sometimes the calculations can become quite long and confusing. Instead, we have developed a quick reference guide tax table containing the 2022 average tax rates for individuals at various income levels.
Using this table makes it quicker and easier to calculate average taxes payable. This table assumes that just the basic personal exemption is claimed.
|
Taxable income |
2022 approximate average tax rate – combined Federal and BC (per cent) |
Tax payable |
After-tax income |
|---|---|---|---|
|
$15,000 |
0.60 |
$90 |
$14,910 |
|
$20,000 |
4.20 |
$840 |
$19,160 |
|
$25,000 |
7.62 |
$1,904 |
$23,096 |
|
$30,000 |
10.28 |
$3,085 |
$26,915 |
|
$35,000 |
12.19 |
$4,266 |
$30,734 |
|
$40,000 |
13.23 |
$5,293 |
$34,707 |
|
$45,000 |
14.10 |
$6,346 |
$38,654 |
|
$50,000 |
14.96 |
$7,481 |
$42,519 |
|
$55,000 |
16.15 |
$8,880 |
$46,120 |
|
$60,000 |
17.15 |
$10,290 |
$49,710 |
|
$65,000 |
18.00 |
$11,700 |
$53,300 |
|
$70,000 |
18.73 |
$13,110 |
$56,890 |
|
$75,000 |
19.36 |
$14,520 |
$60,480 |
|
$80,000 |
19.91 |
$15,930 |
$64,070 |
|
$85,000 |
20.40 |
$17,340 |
$67,660 |
|
$90,000 |
20.95 |
$18,858 |
$71,142 |
|
$95,000 |
21.48 |
$20,408 |
$74,592 |
|
$100,000 |
21.98 |
$21,978 |
$78,022 |
|
$110,000 |
23.44 |
$25,786 |
$84,214 |
|
$120,000 |
24.68 |
$29,615 |
$90,385 |
|
$130,000 |
25.91 |
$33,682 |
$96,318 |
|
$140,000 |
26.97 |
$37,752 |
$102,248 |
|
$150,000 |
27.88 |
$41,822 |
$108,178 |
|
$160,000 |
28.78 |
$46,040 |
$113,960 |
|
$170,000 |
29.76 |
$50,599 |
$119,401 |
|
$180,000 |
30.68 |
$55,217 |
$124,783 |
|
$190,000 |
31.49 |
$59,835 |
$130,165 |
|
$200,000 |
32.23 |
$64,453 |
$135,547 |
|
$300,000 |
38.72 |
$116,165 |
$183,835 |
|
$400,000 |
42.42 |
$169,665 |
$230,335 |
|
$500,000 |
44.63 |
$223,165 |
$276,835 |
|
$600,000 |
46.11 |
$276,665 |
$323,335 |
|
$700,000 |
47.17 |
$330,165 |
$369,835 |
|
$800,000 |
47.96 |
$383,665 |
$416,335 |
|
$900,000 |
48.57 |
$437,165 |
$462,835 |
|
$1,000,000 |
49.07 |
$490,665 |
$509,335 |
The above tax calculations are for illustrative purposes only to be used as a quick reference in calculating an approximate amount of taxes at a certain level of income. The actual tax any given taxpayer owes will vary as there are additional credits that must be factored in. Taking Mr. Jones, for example, he would be entitled to the federal and provincial pension credit, as well as the age credit, so his actual tax on $75,000 would be less than 19.36 per cent as noted above.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email greenard.group@scotiawealth.com or visit greenardgroup.com.
