What the Liberal tax cut really means
Middle-class break will help nine million Canadians with an average rebate of $330 per individual, $540 per couple
Welcome to 2016, the year when most of us are going to have more money in our pockets thanks to the Liberal government’s middle-class tax cut.
Justin Trudeau wasted no time in implementing his campaign promise to reduce the rate for the middle-income bracket from 22 per cent to 20.5 per cent. Tax cuts of this nature are normally announced as part of the annual budget speech, but this one came via a press conference by Finance Minister Bill Morneau on Dec. 7. At the same time, he confirmed a four-percentage point increase in the tax rate on high-income earners (over $200,000 annually) to 33 per cent.
Despite the fact there is no enabling legislation on the books, or even tabled in Parliament, the Canada Revenue Agency moved at record speed to incorporate the new rates into its Payroll Deductions On-line Calculator (PDOC) for employers. I ran some numbers to see how much more money people will have to spend and most of us will get a little extra. But don’t be disappointed if your paycheque this month doesn’t seem that much different from a year ago.
The government says that about nine million people will benefit from this tax change, with the average reduction being about $330 for an individual or $540 for a couple. But whether you receive that much depends entirely on your income. As with all averages, some folks will get less, some more.
Using PDOC, I calculated how much money people at various income levels would receive after tax in 2016 compared to 2015. I assumed Ontario residency in all cases and used claim code 1 for the federal and provincial personal tax credits. Canada Pension Plan and employment insurance deductions were included in the calculation.
Let’s start with Joe, who works in maintenance. He gets paid $2,000 twice monthly, for a total gross income of $48,000 per year. In 2015, his take-home pay every two weeks was $1,553.81. The federal tax on that was $212.26 and the provincial tax was $104.55. The rest was CPP and EI.
Joe’s first pay cheque of 2016 will be for $1,559.60. That’s $5.79 more than last year, thanks to a reduction of $4.43 in his federal tax and $1.36 in the provincial tax. After seeing his bottom line he may be left wondering what all the hype was about. Over the full year, he’ll save $138.96 in taxes, but when it comes in dribs and drabs it doesn’t have much impact.
Now let’s look at Susan, a sales representative who earns $6,000 a month ($72,000 a year). Since she’s in a higher income category, she’ll benefit more from the tax cut. But she may still be unimpressed when she receives her first monthly cheque of $4,383.67. That’s $43.05 more than last year, which amounts to an increase of about 1 per cent in her take-home pay. Over a full year, her tax will drop by $516.60, however the government will take back $64.35 of that in higher CPP contributions.
High-income earners might not fare as badly as they think, depending on their income level. Consider Ann, who earns $216,000 a year as a lawyer, or $18,000 a month. Her monthly take-home pay in 2015 was $10,136.69. This year it will be $10,166.53. You read that right. Even though she earns more than $200,000 and is therefore subject to the new high bracket tax rate, she will actually take home $29.84 more than last year. That’s because the middle bracket tax cut carries through to all the higher brackets as well. Only those with incomes in excess of $218,000 will actually pay more.
Finally, let’s consider low-income earners. There are a lot more of them than those who fall into the middle-income category. In the 2012 tax year (the latest for which full data is available) the Canada Revenue Agency says that almost 16.3 million tax filers reported income under $40,000. The Liberals didn’t offer them any relief so the only break they get is from the indexing of the tax brackets.
Frank, who earns $2,500 a month from his job in the hospitality industry, took home $2,046.20 in 2015. This year his January cheque will be for $2,048.84. That’s a gain of only $2.64, which is strictly due to inflation.
It might be argued that Frank and others like him are the ones that really could have used a tax cut but somehow they got lost in the election hyperbole. Too bad. Gordon Pape is the publisher of the Internet Wealth Builder and Income Investor newsletters. His website is BuildingWealth.ca.