Tax time isn’t just about filing your return, it’s also a key time to look at what strategies you have in place to produce better results. One of the most overlooked strategies is understanding your marginal tax rate and how different decisions can impact how much of your money gets taxed at the various personal income tax brackets.
"Understanding how our tax system works is a very important part of the bigger financial picture as it often affects the bottom line," says Dave Lee, Senior Wealth Advisor at Scotia Wealth Management in White Rock."
Understanding marginal tax rates in Canada
Federal and provincial income tax rates are “progressive,” which means as your income increases, you face higher and higher rates. Your marginal tax rate refers to the rate at which your next dollar of income will be taxed, combining both federal and provincial rates.
Many people don’t realize that a higher tax bracket doesn't mean all your income is taxed at the higher rate – only the income within that bracket is.
Tax brackets for B.C. residents
"When considering both federal and B.C. provincial taxes, your combined marginal tax rate increases as your income rises," Dave says. "For example, if your taxable income is $80,000, the first $49,279 is taxed at 20.06 per cent, the next $8,096 is taxed at 22.7 per cent, and income above $57,375 is taxed at 28.2 per cent. This layered approach ensures that only the portion of income within each bracket is taxed at its marginal rate."
Tax efficiency matters for everyone, but the higher your income the more important decisions regarding interest, dividends, capital gains and which investment accounts to draw income from become.
Understanding your tax rate can also help you plan for deductions, credits and RRSP contributions that could reduce your taxable income.
Tax rates and rules change regularly, so whether you’re filing on your own or with the help of a professional, staying informed will help ensure you maximize your return and minimize unwanted surprises.
Four smart moves to reduce tax and protect wealth
- Know your marginal rate – use it to decide when to defer income and when not to.
- Contribute strategically to RRSPs and TFSAs.
- Consider the type of income – the attractiveness of capital gains and dividends changes at different income levels
- Consult a tax professional for personalized advice on tax planning strategies.
For more information, contact Senior Wealth Advisor, Dave Lee CIM, CFP, FCSI, at Scotia Wealth Management in White Rock by email at dave.lee@scotiawealth.com or by phone 604-535-4743.
Read more from Dave Lee online at www.dave-lee.ca/publications