Federal budget winners and losers: Beware clawbacks

Budget winners and losers: Watch out for clawbacks

Our tax expert lays out the numbers


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It’s reasonably common knowledge that higher wealth accumulators in Canada will want to do some extra planning to avoid the 33% high income tax rate in the terminal return of the last surviving spouse.  This is generally accomplished by averaging in their taxable pension amounts throughout retirement, if possible.

However, a sharp eye on marginal tax rates is important in this activity, because clawbacks of the Age Amount and Old Age Security can make income averaging opportunities challenging.

In fact, when you ask the question, who pays the highest marginal tax rates in Canada, you might be surprised to know it’s not always those whose income exceeds $200,000.  The answer depends on the type of income sources and also depends on whether the taxpayer is subject to a clawback of social benefits and credits.

Let’s see how clawbacks affect seniors and investors in 2016 under various scenarios.

In the first, seniors are subject to clawbacks of the age amount, the GST/HST Credit and the Old Age Security at various income levels.  (We have looked at incomes over $30,000 which ignores those who qualify for the Guaranteed Income  Supplement (GIS), which is clawed back at rates of 50% as income rises)

 Scenario: Ontario senior couple, one with eligible pension income spouse has no income

Current Clawback Rules
Income MTR(tax) MTR with clawbacks
$30,000 20.05% 20.05%
$40,000 20.05% 40.10%
$50,000 29.65% 51.15%
$60,000 29.65% 51.15%
$70,000 29.65% 51.15%
$80,000 31.48% 72.48%
$90,000 37.91% 58.41%
$100,000 43.41% 63.91%
$110,000 43.41% 63.91%
$120,000 43.41% 43.41%
$130,000 43.41% 43.41%
$140,000 43.41% 43.41%
$150,000 46.41% 46.41%
$160,000 47.97% 47.97%
$170,000 47.97% 47.97%
$180,000 47.97% 47.97%
$190,000 47.97% 47.97%
$200,000 47.97% 47.97%
$210,000 51.97% 51.97%
$220,000 51.97% 51.97%
$220,000+ 53.53% 53.53%

Clawbacks of social benefits and credits occur as income rise. A typical relief is to reduce net income with an RRSP contribution, if the taxpayer is age eligible and if there is contribution room.

That’s important. Given the prohibitive marginal tax rates, RRSP contribution opportunities form part of the overall retirement income planning pre-retirees do. So do subsequent re-investments of after-tax remainders into Tax Free Savings Accounts.

Read: The winners and losers of the Canada Child Benefit

Read: What the budget means for seniors