CRA data shows little to be gained from raising minimum tax on top earners

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One of the more curious elements of last week’s nearly 300-page federal budget was a disturbing statement that “some high-income Canadians still pay relatively little personal income tax as a proportion of their income.” .

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The budget document provided statistics, using 2019 tax data, which showed that 28% of filers with gross income over $400,000 (which was the highest 0.5% of all income), either about 41,400 people, paid an average federal tax. rate of 15 percent or less using a variety of tax deductions and tax credits. In more detail, the data shows that nearly 18% of these top earners (about 27,000 Canadians) paid less than 10% federal income tax. And apparently 1.6% (2,400 filers) paid no federal taxes.

The data was released to introduce the government’s review of the alternative minimum tax (AMT), the results of which will be published in the fall economic update. But are these figures really worrying? Is there anything harmful in such a low effective rate? Or do taxpayers just follow the law according to the well-accepted rule Principle of the Duke of Westminster which states that “taxpayers have the right to organize their affairs so as to minimize the amount of tax payable”. Based on a 1936 UK tax case, this principle has been confirmed more recently by the Supreme Court in a November 2021 decision.

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This is a question worth exploring. For starters, keep in mind that the budget statistics only looked at the federal tax rate and not the combined federal/provincial rate. Currently, there are five federal income tax brackets for 2022: zero to $50,197 of income (15%); more than $50,197 to $100,392 (20.5 percent); above $100,392 to $155,625 (26 percent); more than $155,625 to $221,708 (29 percent); and anything over $221,708 is taxed at 33%.

Due to graduated and graduated rates on the first $221,708, federal tax for 2022 on $400,000 of ordinary income would be approximately $109,000 for an average federal tax rate of approximately 27%, before take into account tax-advantaged income and various other deductions and credits. .

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Capital gains are only taxable at 50%, which means that an individual who realizes a one-time gain on the sale of his cottage of, say, $400,000, would have gross income of $400,000, but a taxable income of $200,000, because only half the gain is taxable. In the absence of any other income, the federal tax bill would be approximately $43,000 and the average federal tax rate would be 10.8% on capital gains. But is the cabin salesman, who had a year of very high incomes, really a “high income” on which the government should charge an AMT?

A quick look at the Canada Revenue Agency’s 2019 income statistics for the 2017 tax year (the most recent publicly available data) shows that 51% of top income tax filers (defined for these statistics as those earning more than $250,000), approximately 312,000 Canadians reported a taxable capital gain, with the average being just over $125,000, which would likely indicate that the average capital gain was d around $250,000.

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Next, consider an investor who earns $400,000 in eligible Canadian dividends. Due to the dividend tax credit, equal to 20.73% of actual dividends received, the federal tax on $400,000 of eligible dividends would be only $76,000 for an average federal tax rate of 18, 9%, which may also reduce the average tax rate from the expected rate. Two-thirds of top earners in 2017 declared Canadian dividends, with the average amount over $100,000.

Of course, tax deductions can also reduce your average tax rate. The top three deductions (by total dollar value) claimed in 2017 by top earners were the Registered Retirement Savings Plan (RRSP) deduction, the Lifetime Capital Gains Exemption (LCGE), and the employee stock option deduction.

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Canada Revenue Agency data for 2017 shows 60% of high earners claimed an RRSP deduction (average claim of $38,730, meaning some taxpayers were clearly making up unused RRSP contribution room) . And although the employee stock option deduction was only taken by the top 4% of earners, the average deduction was nearly $152,000. (This should start to decrease in the coming years since the rules limiting the benefits of the stock option deduction were changed on July 1, 2021).

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In 2022, the ECGC eliminates taxes on $913,630 of capital gains from the sale of qualified small business corporation shares and $1 million of capital gains from the sale of qualified farm or fishing property. CRA data shows that nearly 18,000 of the highest income taxpayers in 2017 claimed LCGE deductions valued at $4.6 billion, with the average claim amounting to around $260,000, equivalent $520,000 of non-taxable capital gains. This will likely explain the zero tax rate for some taxpayers in the 2022 budget document.

Finally, to credit, charitable donations. A high-income person who makes a large donation of, say, $100,000 to a charity would qualify for a federal donation tax credit of 33%. The tax payable on $400,000 after taking into account the tax credit for a $100,000 donation would be approximately $75,000 for an average federal tax rate of 18.9%. CRA data shows that in 2017, 64% of top earners said they made a charitable donation, with the average donation being $17,389. Charitable donations, depending on the amount, can significantly reduce your average tax rate.

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We already have a federal AMT at a rate of 15%. If the government wishes to preserve all the benefits of charitable donations, keep integration intact by allowing the dividend tax credit designed to minimize double taxation of corporate income and maintain the lower capital gains inclusion rate or the ECGC on the single sale of a cottage, business or agricultural or fishing property, there is little tax revenue left to be collected in an updated AMT, especially given the changes already introduced last year on the options employee stock purchase.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is Managing Director, Tax and Estate Planning at CIBC Private Wealth Management in Toronto. [email protected]

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