As you prepare to cast your vote in Monday’s federal election, it’s important to keep in mind that each of the parties has made various promises that could affect your pocketbook going forward. Here’s a last-minute look at a couple of tax issues.
Perhaps the hottest personal tax topic in the election campaign was the promised rollback of the TFSA annual dollar limit, which was increased to $10,000 earlier this year by Prime Minister Stephen Harper’s Tory government. Both the Liberals and NDP have promised to repeal this increase and have the limit revert back to $5,500, the annual dollar limit before the Conservatives made the change.
So, as a practical matter, if you anticipate an upcoming Liberal or NDP government, should you rush out and make your $10,000 2015 TFSA contribution before the election results are known?
In my view, it’s not necessary. Legally, a government can pass retroactive tax legislation, but dropping the limit back down to $5,500 for 2015 would create an administrative nightmare for both the Canada Revenue Agency and TFSA providers, not to mention TFSA holders who have already contributed $10,000 based on the current limit, which was passed into law on June 23. It would effectively put thousands of Canadians into a potential over-contribution penalty situation — not necessarily the best way for a new government to start off.
Any drop to the limit would more likely be effective for 2016, meaning that the 2015 TFSA dollar limit of $10,000 would remain on the books and you might even be able to make your $10,000 2015 contribution next year or indeed, in any future year, since unused TFSA contribution room automatically carries forward from one year to the next.
While federal tax rates have remained relatively constant for the past decade or so, the Liberals have stated that, if elected, they would cut the middle income tax bracket to 20.5 per cent from 22 per cent. The middle tax bracket currently affects Canadians with taxable annual income between $44,701 and $89,401.
The Liberals also promised to introduce a new tax bracket of 33 per cent for individuals earning more than $200,000 annually. The current top federal bracket of 29 per cent hits individuals making taxable income over $138,586. For these high income earners, that means their total combined federal/provincial marginal tax rate for 2015 will exceed 50 per cent in more than half the provinces, with New Brunswick’s top rate a whopping 58.75 per cent!
While the average Canadian may not have much sympathy for the tax bill of someone earning over $200,000, it brings up the broader policy question of how high the tax rate can go before it becomes a psychological barrier to work. The 1966 Carter Royal Commission Report on Taxation maintained that the limit was 50 per cent before the rate threatened productive effort (even though a government’s revenue needs may call for a higher rate.)
As the Commission wrote, “We are persuaded that high marginal rates of tax have an adverse effect on the decision to work … (and) on the decision to save.… We think there would be great merit in adopting a top marginal rate no greater than 50 per cent. With such a maximum marginal rate, taxpayers would be assured that at least half of all gains would be theirs after taxes. We think there is a psychological barrier to greater effort … when the state can take more than one half of the potential gain.”