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Marginal Tax Rates: Ontario 2008

Written by

jiHymas

in

Here are the rates from the E&Y Tax Calculator, as updated to include legislation to May 8, 2008.

Clawbacks are not included; I am hopeful that at some point I will be able to get some authoritative data on the effects of clawbacks, but have not found anything credible … please contact me if you do know of any credible public sources!

Investors Taxable Income Marginal Rate
on Interest		 Marginal Rate
on Eligible Dividends		 Equivalency Factor
Widows & Orphans $30,000 21.05% 0.00% 1.27
Professionals $75,000 39.41% 13.81% 1.42
Plutocrats $150,000 46.41% 23.96% 1.42

These figures are not much different from the 2006 numbers. The top marginal rate on eligible dividends is expected to increase to 26.7% in 2012; this would decrease the equivalency factor to 1.37. But frankly, I take estimates of future taxation rates with a grain of salt – we have no way of knowing what will be politically convenient next month, let alone four years off.

Comments

5 responses to “Marginal Tax Rates: Ontario 2008”

  1. prefhound

    I love a challenge and looked at this in 2007 using 2006 marginal tax rates. It is a very complicated calculation, especially for couples which have lots of income splitting possibilities to minimize OAS and total tax.

    Nevertheless, here is the general idea about OAS claw back for a single filer:

    – OAS is Income to the recipient (+ve)
    – OAS is taxed as income (-ve)
    – OAS is clawed back at a 15% rate when taxable income is greater than about $62,000 (-ve). However, since the claw back removes it from being taxable income (+ve), the INCREMENTAL tax rate during OAS clawback = 15%*(1 – MTR) where MTR is the marginal tax rate on income.

    The clawback occurs at MTR 33% to 43%, so the Incremental tax rate is about 10 points and 8 points, respectively.

    HOWEVER, OAS is offset to some degree by age credits (+ve) that kick in at the same time. Net, for the 2006 tax year I estimated total tax was lower while receiving OAS if taxable income was less than $73,000 and total tax was higher if income was higher.

    We can go a little further:

    An approximate equation for the Marginal Dividend Tax Rate is:

    MDivTR = 1.45*(MTR – Fed&Prov Tax Credits of approx 26% for 2008; choose your year) + [if OAS applies, 1.45*15%*(1-MTR) ]

    Most of the problem with OAS clawback occurs between $80,000 and $105,000 (rough 2008 numbers), where the MTR = 43.4%. The approximate solution is:

    Dividend Tax Rate = 1.45 * (43.4% – 26%) = 25.2%

    in the presence of OAS clawback: 25.2% + 1.45*15%*(1-43.4%) = 37.5%

    A useful site for Canadian tax calculations is:
    http://www.taxtips.ca/dtc/enhanceddtc.htm
    where I have flagged the federal situation for the next couple of years.

    Blog on!

  2. jiHymas

    OK, but what we’re really interested in is the Equivalency Factor … the scenario is that we’re standing around, with base income of $80,000 and we have $10,000 of uninvested capital that needs to be put to work.

    So how about:

    MIntTR = MTR + [if OAS applies, 15%*(1-MTR)]
    = 43.4% + 15%*(1-43.4%)
    = 43.4% + 15%*56.6%
    = 43.4% + 8.5%
    = 51.9%

    And:

    Equivalency Factor = (1-MDivTR) / (1-MIntTR)
    = (1 – 37.5%) / (1-51.9%)
    = 62.5% / 48.1%
    = 1.3

    Does this look right to you?

    DISCLAIMER: Note that I never give tax advice to clients and that I have no special claim to tax expertise. I’m only curious.

  3. jiHymas

    prefhound left a comment which I deleted accidently while spam-cleaning…JH

    James: what are you doing up at 1:24 am?

    Math looks OK, so the dividend equivalency factor does not change much in the presence of OAS.

    A few folks may have MTR = 33%, for which the OAS dividend equivalency factor is: 1.32

    I wonder if the boffins in the Federal Finance Department knew this all the time…

  4. PrefBlog » Blog Archive

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