The Liberal government is putting into motion some of the economic promises made to Canadians during their campaign. Helping the ailing middle class, which was a major theme in last week’s throne speech, is now official as the Liberals have passed the aptly-named middle-class tax cut.
But that’s not the only tax change in store for Canadians; the nation’s wealthiest can expect a 2016 tax increase along with a higher charitable donation tax credit for that income bracket.
Canada’s New Tax Changes
It’s time for the middle class to catch a (tax) break; the second income bracket for middle-class Canadians will drop from 22 per cent to 20.5 per cent starting next year for those with taxable income between $45,282 and $90,563. This adds up to savings of about $680.
To pay for the tax cut for the middle class, the so-called “one per cent” will have to cough up more; those with taxable income above $200,000 will see a new tax bracket of 33 per cent (the top tax bracket of 29 remains for those with taxable income between $140,388 and $200,000).
To help encourage the wealthiest to give more, there’s a new higher charitable donations tax credit. Under existing tax rules, there’s a 15 per cent federal tax credit on the first $200 in donations and 29 per cent for donations above $200. However, with the new 33 per cent tax bracket, those with taxable income above $200,000 can take advantage of a 33 per cent federal tax credit in 2016.
A Trimmed TFSA
The Liberals also announced the annual TFSA contribution limit will be cut from $10,000 to $5,500 starting in 2016. Not surprisingly the Conservatives, who introduced the tax measure, are upset, claiming it’s denying seniors a way to protect their savings. However, Finance Minister Bill Morneau pointed to the fact that only 6.7 per cent are contributing the maximum to their TFSA, meaning most Canadians aren’t taking full advantage.
Check out the best TFSAs in Canada here>
How Effective Will These Tax Measures Be?
It remains to be seen how these changes will help Canadians. The tax cut for the middle class and tax hike for the top income earners were supposed to cancel each other out. However, according to the C. D. Howe Institute, the federal government will end up with $1.8 billion less in revenue.
When a new tax bracket is introduced, it’s only natural those affected by the tax hike to try to avoid it. They’re looking for ways to reduce their taxable income – that includes tax avoidance. Although not as excessive as the super tax on millionaires in France, Canada may find itself in a similar position, with the federal coffers not taking in as much as anticipated.
Managing Your Tax Windfall
With tax savings of up to $680, the middle class will have more money in their pockets next year. If you’re part of the middle class, what are you planning to do with your tax windfall? Contributing to your RRSP would be a good start. The number of Canadians contributing to their RRPSs continues to fall. Only 23.4 per cent contributed to their RRSP in 2013. With less than a third of Canadians with the benefit of a workplace pension plan, contributing to your RRSP is a great way to ensure you have enough money for your golden years. The TFSA is another great place to sock away your money and watch it grow tax-free. Of course, if you have high-interest debt like credit card, paying that down should take priority over anything else. Whatever you choose to do with your tax windfall, be sure to put it to good use.