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Canada’s New Tax Brackets: Political Rhetoric vs Reality

When Canada’s new Finance Minister, Bill Morneau, checked the financial cupboards he found them empty. No one was surprised. Lower oil prices and higher costs related to a difficult economy decreased the federal bottom line by $6 billion, from a small surplus to a small deficit. Morneau stressed that his numbers did not factor in any of the promises his party made on the election trail.

In spite of the empty cookie jar, I wish the Finance Minister a lot of luck going forward. He’ll need all the good luck he can find to pay for the Liberal election commitments.

He’ll also need the support of Canadian taxpayers, especially those with above average incomes. They’re the ones paying most of the income taxes our new government is counting on.

Who is Above Average?

But who is above average? When I do the election math, things quickly get confusing. Canada’s “middle class” was a hot topic during the campaign. Attempting to appeal to a broad base, Prime Minister Trudeau promised to reduce the federal tax rate for middle bracket taxpayers by 1.5 per cent, from 22 to 20.5 per cent. What does this actually mean? And who will benefit?

A majority of Canadians think of themselves as middle class and, in theory, should therefore be beneficiaries of the Liberal largesse. That sounds like a win for all of us “middle class” folks, until you do the math.

People with taxable incomes between $45,000 and $90,000 will save up to $675. But if your taxable income is only $50,000, you’ll save just $75 a year.

Before you rush out to spend your anticipated tax savings, consider this: According to Statistics Canada, the median income of the 26 million people who filed tax returns in 2013 was a mere $32,020. Less than a third had incomes over $50,000. Put another way, it appears the tax saving for the middle class will go primarily to people earning substantially more than the average Canadian.

The confusing logic doesn’t end with who will get the potential $675 tax saving. It seems “middle class” is a very elastic term. Check this out: The tax saving will go to households with one person earning $90,000. Twice as much will go to households with two people earning $90,000 each for a total of $180,000. That’s a great deal more than the median 2013 household income of $76,550!

It’s a script we’ve seen before – election rhetoric with very little basis in reality. Only the 10% of taxpayers with Canada’s highest incomes will enjoy the full $675 benefit. Go figure!

Funding From Above

Of course the cash to fund the promised “middle class” tax reduction needs to come from somewhere. The Liberals promised a new tax bracket for taxpayers earning more than $200,000 – 1.3 per cent of tax filers in 2013. Their new top federal bracket will increase from 29 to 33 per cent. If high income Canadians happily wave the flag when their tax bill increases, the books might balance. Maybe. But that’s not how most people react when told their biggest expense just increased by 14 per cent!

Combined with new top-tier tax rates in several provinces, the Liberal tax increase on high income earners may well be the trigger that prompts them to consider alternatives. How much Canadian cash flows out of the country as a result of Trudeau’s new and improved tax bracket is anyone’s guess, but you can bet it will be significant. Even if tax rates are decreased in the future, those funds are unlikely to come back.

A Christian Response

The new tax rates create a conundrum for taxpayers with above average incomes who believe that a good government looks after the poor and marginalized – that it is Biblical for those who have much to share with those who have little. Given that the so-called middle class tax cut will primarily benefit people with incomes that are well above average, was it ever a good idea?

For the 1.3 per cent of citizens earning more than $200,000, the reality is even more dramatic. Of course most people earning less, including many who pay no income taxes at all, will applaud the new top bracket. They have nothing to lose. But what is the moral obligation of the very small minority whose taxes will increase? Is there ever a time when the legal right to minimize income taxes should be reconsidered?

For followers of Jesus, any soul-searching should begin with this question: Who owns it all? If we truly believe we are stewards, this could turn the issue on its head. Each one of us has to answer for ourselves.

There may be a win-win for all truly generous taxpayers, people who believe stewardship is about more than just paying mandatory taxes. The federal donation tax credit is based on the top federal rate. Today the rate is 29 per cent for donations over $200. Will that increase to 33 per cent when the new tax bracket kicks in? I hope so. This would be a benefit for every generous taxpayer, including those whose incomes are merely average.

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About the author

Henry Friesen is a chartered accountant who lives in a small town near Winnipeg, Manitoba.