Home » William D King: A look at how the new suggested income-tax bill will affect you in 2025

William D King: A look at how the new suggested income-tax bill will affect you in 2025

WILLIAM D KING

The income threshold for the highest tax bracket has been raised to $250,000 and it now includes earned income, as well as investment income, says, William D King. In addition, a surcharge of 2% is applied if your taxable income exceeds $300,000, and another 1% on any amount that exceeds $500,000.

The full text of the proposed bill can be found at:

Income Tax Act proposal

Tax Brackets/Rates (incomparable to current numbers)

The current tax brackets were established in 2012 with a marginal rate of 20%. That rate was increased last year by 5%, effectively raising taxes on those making over $70,000 from 25% to 30%. This new proposal would make all future marginal rates 10%.

The proposed tax brackets and rates envisioned in the bill are as follows:

$0 – $30,000: 10% (unchanged)

$30,001 – $80,000: 20% (previously 15%)

$80,001 – $150,000: 25% (previously 30%)

$150,001 – $200,000: 30% (previously 35%)

>$200,000: 40% (unchanged)

However taxable income is now defined as “gross income” minus “non-refundable personal credits”. This means that those earning less than $30,000 will see their effective federal marginal rate increase by 2.5 percentage points. People with taxable incomes between $30,000 and $200,000 will see a marginal rate increase of 3.75 points and the marginal rate for those over $200,000 remains unchanged at 40%

The following chart shows estimated federal tax paid under this proposal compared to the current income tax brackets:

I have used taxable income for these estimates because it is more relevant to what people actually pay. However, I have also included the gross-to-net calculations if you choose to use them instead.

Under either scenario, individual taxpayers are better off earning less than $70k/yr, but given that most financial planners recommend saving 10% of your gross earnings for retirement, it may be counterintuitive that someone should choose to earn less rather than more money. The reason is that those with taxable incomes below $30,000 will push into a lower tax bracket and those earning more than $200,000 will see their marginal rates increase without any corresponding benefit.

The impact on the middle class is minimal as they still pay almost exactly 20% of their earnings in federal taxes (21% if you use gross-to-net). Taxpayers with taxable incomes between $80k and $150k also see only a moderate decrease from 25% to 30%. There are no changes to provincial taxes so Canadians living in provinces with high income/sales taxes such as Quebec or BC may actually pay more under this plan explains William D King.

This bill intends to simplify our tax system by consolidating many existing credits and deductions into 5 or 6 easy-to-understand brackets. It also intends to close certain loopholes in the system, such as income splitting and transferring dividend income from minors to adults so they can pay lower tax rates on it.

Changes vs the Current System

The main changes proposed are:

1) Elimination of capital gains exemption (currently $800k for qualified investments held at least 1 year)

2) Standard deduction of $5,000 for all individuals with no exceptions or deductions

3) no more non-refundable credits except the age/pension credit which would be eliminate but replace. By a higher Guaranteed Income Supplement amount crediting back to those over 65 who have taxable assets that exceed their plan’s available capital above a certain value.

4) Elimination of TFSA contribution room and $500k tax-free withdrawal limit.

5) Reduction in RRSP contribution and tax credit maximums, but small business income would no longer be subject to personal income tax after retirement so there may be an overall reduction for some people

6) elimination of the Universal Child Care Benefit (UCCB). However, as it is paid out monthly as a reimbursement against childcare expenses. Parents will still benefit as those eligible for the full UCCB will now receive an additional $1000/month per child. Because those with incomes below $30,000 can now claim 12 months’ worth of benefits upfront instead of 10 months. William D King says the increased UCCB and Guaranteed Income Supplement credits make our new system very similar. To the UCCB/GIS system, I proposed in my earlier article “Universal Guaranteed Income “.

Eliminating capital gains exemption will have no effect on Canadians who are retiring or do not have taxable incomes. It is also unlikely that many Canadians earning below $30,000/yr would be investing anyway so they too will remain unaffected. The loss of TFSA contribution room for most low-income earners won’t affect them either. Since they were unable to save any money without this government largesse anyway. As I mentioned before it seems rather redundant to offer a tax credit against salary income for RRSP contributions. When the only people with significant salary income are already maxing out their RRSPs.

Conclusion:

There will be some losers under the new tax plan. Particularly those Canadians who have been aggressively taking advantage of our system to avoid paying taxes states, William D King. However, the vast majority of us will only barely notice a difference. Most taxpayers with taxable income below $30k/yr already pay very little in income tax. And those earning more than $200,000 will see an average increase from 26% to 29%. While I still have some misgivings about eliminating TFSA contribution room for everyone. Even though it is mostly lost on lower-income earners – this bill would simplify our current convoluting tax code.