My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, October 20, 2014

In Ontario, You Are Rich If You Make $220,000!

I think most people would agree, that those of us who make the most money ("the rich") should be taxed at higher marginal tax rates. However, what we may not all agree upon is what level of salary/income makes you “rich” and what the highest marginal tax rates should be. In Ontario, where supposedly only 2% of income earners make more than $150,000, “sort of rich” now starts at $150,000 and you are considered rich at $220,000.

I guess it is all a matter of perspective (my accounting/tax practice and blog is/are directed at high net worth people and small business owners so my living depends on the “rich”) but to me, if you make $200,000 or even $300,000, you are doing extremely well, but are far from being wealthy or rich, especially if you live in Toronto.

A few weeks ago I was undertaking some dividend tax planning for a family that has various family members scattered across Canada. When I compared the taxes that were payable by the child in Alberta and the child in Ontario, I thought I had made an error in calculation. There was a massive tax payable variance on this dividend.

That Alberta and Ontario have a significant taxation gap is not new news. What caught me off guard, and I think will catch several Ontarians off guard at tax time this year, is the impact of the new marginal tax rate threshold in Ontario. In 2013, Ontario taxed incomes over $509,001 at the highest marginal rate. For 2014, the $514,090 threshold in Ontario was dropped to $220,000, and a second level of higher tax rates was introduced for those with income between $150,000 and $220,000.

The excellent website Taxtips.ca, reflects that the highest combined marginal rate for an Alberta taxpayer on a non-eligible dividend paid by the typical small business is 29.36%. In Ontario, that rate for someone who makes over $220,000 is 40.13%. If a small business pays a $200,000 dividend to a high marginal rate child living in Alberta, he/she will owe approximately $59,000 in tax on that dividend; while that same dividend will be taxed to the other child in Ontario at approximately $80,000.

For your information, the highest marginal rate on employment and interest income in Alberta is 39% versus 49.53% in Ontario. Although it should be noted that Alberta considers you rich at $136,270.

The point of this post was twofold. Firstly, to warn those of you who earn more than $150,000 in Ontario, that you may owe substantially more income tax next April; especially if you have self-employment, rental income, or other investments (not subject to tax withholding) and secondly, to note the huge taxation discrepancy between Alberta and Ontario. I expect there are going to be many Ontario accountants dealing with angry nouveau riche clients next April.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

8 comments:

  1. Taxation, the gift that keeps on taking pounds of flesh. Glad to see Ms. Wynne found another way to balance the budget.

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    1. Hey Alan

      For some reason, these increases seemed to fly under the radar.

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  2. For my wife, it was willful ignorance. When I spoke of Ms. Wynne's new taxes at a level that I could now conceivably hit with my new self-employment in the GTA, she insisted rich people should pay more in taxes... and we can't be rich, we live in a townhouse!

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    1. Hi Joel

      What does your wife now think about rich people paying more in taxes? Wait until she finds out your income will probably be too high for income splitting when the Conservatives introduce that initiative.

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  3. "I expect there are going to be many Ontario accountants dealing with angry nouveau riche clients next April."

    Could be used to prepare yourself as well...from clients!

    I don't think "rich" is $150,000 per year. I define "rich" as what you have not what you can spend, at least in monetary terms. Those that have millions of dollars in bank are somewhat "rich". People that make 6-figures and have no investments to speak of, not so much.

    Hope you're having a good fall Mark. The golf seasons is pretty much done in Ottawa; 6 or 7 Deg. C and blowing wind everyday. Good times.

    Cheers,
    Mark

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    1. Thx Mark, hopefully your blog is making you "rich"--I played way better down the stretch, one year we have got to play together.

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  4. Actually the decision on who is rich in Alberta is wholly determined by the federal government's marginal tax brackets. Alberta's 10% provincial income tax is a flat tax applied on everyone earning more than 17,787.

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    1. Thx for the clarification, I just know Albertans pay way less tax

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