An Assiduous Reader of PrefLetter writes in and says:
I believe your Equivalency Factors for taxes (Table 3 in Preletter March) are wrong for low-income earners.
The dividend credit can be applied to other income which results in a negative marginal tax rate on dividends. For example, for BC $30,000, 2009 tax year, this is -14.36% (regular income taxed at 20.06%) so
equivalency is 1.43.This handy website will give you the marginal rate without capping them at 0% like the E&Y calculator does:
The point is well taken – but unfortunately I do not consider taxtips.ca to be an authoritative source. According to their website:
TaxTips.ca is owned by a small private company located in Cedar, British Columbia. It is prepared by a husband and wife team who are retired from owning and operating a small business, with one being a retired CGA (Certified General Accountant). The goal of the site is to be a reference site for easy to understand tax, financial, and related information.
In order to consider a source authoritative I want to see names. I also want to see that the person making a claim has something at stake in the matter and is pronouncing on a subject on which they are earning a living. I consider it highly important in this wonderful world of looney-tunes in which we live that somebody maing a claim get hurt – either directly in the pocketbook, or (as in the case of academics) in reputation – if they make a mistake. And size helps (although I am realistic enough to recognize that it’s no guarantee): Ernst & Young, for instance, will have many opinionated partners who will jump on any egregious or doubtful claim because E&Y’s reputation is their reputation. While this means that many publicly expressed opinions get diluted to the point of uselessness, it does imply that what they do say has a reasonably good probability of being right.
So, while the Assiduous Reader’s claim has a ring of truth to it, I am – as I always stress – not competent on tax matters and am looking for an authoritative source to substantiate the claim. Any help will be appreciated.
The taxtips.ca link was provided more as a convenience (as a source of pre-computed marginal rates) rather than being the bulk of my central argument. A quick perusal of the T1 and Schedule 1 forms and guide will make it blatantly obvious that the marginal tax rate on dividends for low-income earners is indeed negative (_assuming_ the taxpayer has sufficient other income so that the overall net tax owing for the year is not negative).
For the federal component, here’s how it would work:
Given an eligible dividend in amount d we would have
1.45*d on line 120 (gross up)
This would increase the taxable income (line 260) by the same amount.
On Schedule 1, step two, we find that the tax owing from this is 0.15*1.45*d.
On line 425 we would enter 0.189655*1.45*d
Which would reduce federal tax (line 406) by the same amount (as long as it was not negative).
So net effect is 0.15*1.45*d-0.189655*1.45*d = -0.0575*d
This result agrees perfectly with the federal tax amounts on taxtips website:
http://taxtips.ca/taxrates/canada.htm
I haven’t verified the provincial/total but there’s no doubt it’s negative rather than 0 as E&Y claim and I’m inclined to trust the meticulous people at taxtips.ca have computed it correctly.
Come on James, don’t shy away from a bit of research and wait for some supposed “expert” to give you the bottom line. It’s not like you!
Turns out the fine folks at taxtips.ca have a page addressing negative taxation skeptics such as Mr. Hymas:
http://taxtips.ca/dtc/enhanceddtc/negtaxrate.htm
Perhaps E&Y put the low-income bracket tax rates for eligible dividends at 0% because the dividend tax credit is non-refundable. Or perhaps their tax calculator was put together by a first year CA that didn’t know what they were doing.
the E&Y calculator is located here: http://www.ey.com/CA/en/Services/Tax/Tax-Calculators-2009-Personal-Tax
The footnote at the bottom states: “These calculations do not include non-refundable tax credits other than the basic personal tax credit. To determine the value of other non-refundable tax credits that may be available, see the individual rate cards.”
The big 4 accounting firms put almost zero useful tax information on their websites. This is to be expected since they are in the business of selling advice.
I have a tax rate card from AIC Funds that also show negative rates for dividend income in low brackets.
You guys are missing the point.
The Big 4 don’t give a rats ass about low income earners.
EVER got a bill from KPMG?
[…] have an inherent distrust of writers on the internet that choose to remain anonymous. Quoting James Hymas, who shares my sentiment on the issue: I consider it highly important in this wonderful world of […]
[…] appears to have put a floor of 0.00% on the published marginal tax rate for dividends; in fact, the tax on dividends can be negative if the taxpayer has other income available to soak up the excess dividend tax credit. This will […]