With the news of a Liberal majority Monday night, comes the creation of Canada’s newest tax bracket. Justin Trudeau pledged to increase taxes for the country’s wealthiest residents. Once enacted, those earning more than $200,000 will enter a new tax bracket of 33%. That’s 4% higher than the current maximum rate. In some parts of Canada, the new rates could combine with provincial tax rates to push residents past 50%.
What does this mean for Canadians who earn less than $200,000 but for whom a bump in pay would push them into the soon-to-be created bracket?
It depends on how much over $200,000 your income would be. “The closer to $200,000 you are, the less impact this will have on you,” explains Jonathan Van Dijk, senior tax manager at KPMG.
Remember that only the portion of your annual income that is over and above $200,000 would be exposed to the new rate. Someone whose income hits $205,000 after a pay bump would only have $5,000 taxed at 33%, which amounts to $1,650—not a huge difference from what they would already be paying. However, someone who earn $250,000 would see $50,000 taxed at the new rate. That’s $16,500 back to the government, $2,000 more than under the current tax system.
Keith MacIntyre of Grant Thornton LLP points out that the new government still needs to pass the changes in Parliament, and any changes wouldn’t take effect until at least early 2016. This means Canadians who own businesses and set their own income could decide to take their raises early, ensuring that the current income tax rate is applied to their salary now rather than the new rate.
MacIntyre also points out that it’s a tax on income, not capital. For instance, someone could come into an inheritance that drives their annual wealth above the $200,000 threshold, but they won’t be subject to the higher rate of tax.
“You’re not worse off by making more money,” he says.
Around 340,000 Canadians earned $200,000 or more in 2013, according to Statistics Canada. Here are a few examples of how the new tax bracket would affect some high-income earners:
Annual salary: $220,000
At the current rate: You would have paid $5,800 of Federal tax on the $20,000 above $200,000
At the new rate: You would pay $6,600 of Federal tax
A rise of: $800
Annual salary: $300,000
At the current rate: You would have paid$29,000 of Federal tax on the $100,000 of income above $200,000
At the new rate: You would pay $33,000 of Federal tax
A rise of: $4,000
Annual salary: $1,000,000
At the current rate: You would have paid $232,000 of Federal tax on the $800,000 of income above $200,000
At the new rate: You would pay $264,000 of Federal tax
A rise of: $32,000