Did you get a raise? Well done! Now it remains to be seen how much will actually be left once the tax authorities have taken over their share.
The question is worth asking because our tax system is progressive. This means that the higher our income, the higher the taxes on us. For example, the marginal tax rate for the $54,000 to $94,999 income bracket in 2023 is 36.12% (including federal and provincial income). However, for incomes from $100,000 to $159,599, it increases to 47.46%. For those lucky enough to earn $400,000 and above, we're talking 53.31%.
But that's not all, because the income earned also has an impact on the social and fiscal measures to which we are entitled, such as family allowance, the Canada child benefit, the allowance for childcare costs, the tax allowance for solidarity, the work bonus, the GST credit etc.
Not surprisingly, the higher the salary, the less we benefit from these measures. “Therefore, to calculate the real impact of additional income if we receive a raise, for example, we need to apply the effective marginal tax rate (TEMI), which gives us a better idea of what we are really left with,” explains Anik Bougie, financial planning practice manager and taxes at Professionals' Financial.
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Laferrière rushes to the rescue
The calculation is complex, but fortunately you can use the famous Laferrière curves, well known to financial and tax planners, to guide you.
Claude Laferrière is a Quebec tax expert and retired professor from the University of Quebec in Montreal who, every year since 1999, has published a series of curves that clearly show the impact of the real tax rate on additional income. They can be viewed on the University of Sherbrooke's Department of Taxation and Public Finance website at this address.
He created 42 curves based on scenarios describing different types of households (single people, couples, with or without children, single-parent families, etc.).
Simply click on the budget table that suits you best on the page to get a good overview of your situation.
Two illuminating examples
Using the updated curves for the tariffs applicable in 2023, Anik Bougie analyzed the situation of two households
Example 1: Single people under 60 years of age earning a gross salary of $55,000. According to the 2023 tax tables, the marginal tax rate would be 36.12%.
What would happen if he got a $5,000 increase in his annual salary? “The METR for this income would be 50.1%. Its solidarity and GST tax credits will go down and its social security contributions will go up,” she explains. Specifically, this means that of the $5,000, $2,500 remains.
Example 2: single parent with two children. Only one of the children is under six years old and attends a subsidized daycare center. The gross salary is $55,000 and the marginal tax rate is again 36.12% according to the 2023 tax tables.
With a raise of $5,000 the picture changes radically as his TEMI would increase to 66.7%! “The difference between the two rates represents the impact of the additional income on the socio-fiscal measures applicable to this type of taxpayer.” There would be a reduction in the Canada Child Benefit, the GST credit, as well as the family allowance and the solidarity tax credit . At the same time, social security contributions would increase,” explains Anik Bougie. As a result, only $1,665 remains in this taxpayer's pocket…
Even if this seems paradoxical and contradicts the desire of governments to support the most vulnerable people, this calculation clearly shows that the impact would therefore be greater for these types of households.
- If you benefit from a raise, you should do your calculations carefully to know what the actual impact of taxation will be on your income and to avoid unpleasant surprises on your next tax return.
- If appropriate, you might consider contributing to or increasing your contribution to your RRSP to reduce the negative impact.
- Please note: If you use Laferrière curves to evaluate the tax benefits of an RRSP deduction, you must make a downward adjustment. In fact, tax expert Claude Laferrière warns in his warnings that this contribution does not entail a reduction in contributions to the QPP, RQAP or unemployment insurance and that additional income often leads to an increase in these contributions.
- Another nuance to note: the curves cannot be used for people aged 75 and over, since the basic retirement pension pension has been increased since July 2022, which leads to distortions in the calculations.