Marginal tax rates: a common misunderstanding

“There is no point in working more, because I end up paying more to the government”. This is a statement that I have encountered far more than I would have thought; whether it be during a client meeting or at my own dinner table.

Many Canadians shudder at the thought of sending more than their share to the CRA, and this feeling often leads to change in behaviour. It’s not uncommon for us to make financial decisions based on tax avoidance, tax mitigation, or tax deferral. With that in mind I am here to reassure you – working more or taking that bonus will not leave you ‘in the hole’!

The Canadian tax system is graduated, or progressive, meaning each dollar earned is not taxed at the same rate. In fact, Canada has a basic personal exemption that allows an individual to earn up to a certain amount of income without having to pay any income tax at all.

This graduated system consists of different marginal tax rates, where each rate is only applied to a range of income earned. Think of this system like a set of stairs – each new step corresponds with a slightly higher tax rate. Each different rate, or bracket, is only applied to the dollars earned on that stair. The following chart is based on 2019 Ontario and Federal tax rates:

Let’s take a closer look at this diagram with a real-life example. An individual earns a salary of $80,000 per year. By referencing the ‘stair case’ above, we can easily find their marginal tax rate: 31.48%.

But what does this mean? Will this rate be applied to their full salary? The answer is no! Looking back at the diagram, we can see that income in excess of $77,317 is taxed at 31.48%. All previous ranges are taxed at the corresponding rates:

The common misconception lies in the math. We don’t simply apply the highest marginal rate to an individual’s entire income. We break the income into segments, or ‘stairs’, in our example, and tax each segment accordingly.

With this in mind, the thought process of ‘more income = more tax’ is technically correct. But it is often misunderstood. Even if taxed at a higher rate, additional income resulting from a bonus or an extra shift will still leave you with more money in your pocket.

While this may be true, there are plenty of reasons to not take that overtime shift. Achieving balance is something many of us strive for – rightfully so. Opting to spend time with family, friends, or a significant other, or taking personal time for hobbies can allow for a much needed break from the workplace.

Turning down additional hours for tax reasons would be equivalent to turning down a raise, a bonus, or per diem. These extra earnings can always be redirected to an RSP to offset the additional tax if that is a concern. In turn, this can create more resources down the road for retirement that you may not have had otherwise.

Another consideration in this scenario is time value of money. A dollar earned today has more purchasing power than a dollar earned tomorrow. As inflation raises the cost of goods, the purchasing power of a dollar erodes. This holds especially true for younger income earners who are planning for larger purchases. For example, many young would-be homeowners have seen their affordability and purchasing power eroding at a rapid rate given current housing market conditions. For extra income earned that is intended to be saved or invested, the same concept applies. Through compound interest, a dollar invested today holds more long term purchasing power than a dollar invested tomorrow.

In fact, if we look at historical return rates, a dollar invested in your 20’s is more valuable than a dollar invested in your 30’s; which in turn is more valuable than a dollar invested in your 40’s, and so on. There are many tools such as this compound interest calculator to help illustrate this concept. Try it out for yourself!

If the goal is having more money in your pocket, today, tomorrow or for retirement, don’t be quick to pass up those extra hours.

Joe Murray is an Associate Consultant at Rettinger & Associates Private Wealth Management. With a background in economics and a passion for financial planning, Joe’s ability to simplify the complex is unmatched. By identifying opportunities in risk management, tax planning, investment strategies and budgeting, Joe builds a road maps for success, today and in the future.


Guiding principles for a new decade

Happy New Year!

As we begin a new year (and a new decade!), it was suggested that I should share some thoughts and offer something uniquely profound to consider and reflect on. While I hope not to bore you, I wouldn’t go so far as to suggest that I have any deep insights or ‘secret sauce’ to offer up.

What I will say, is that it is a privilege to work alongside our clients, and our entire team values the personal relationships that we develop with each of them over time. Partnering with our clients to align their money and their lives gives us a front row seat to witness the many milestones and life events that they experience. In order for us to fulfill our practice values, we need to be more than merely competent and responsive. We have to make deep personal connections to better understand what inspires them, and conversely what worries them or keeps them up at night. Only then, can we work to eliminate the clutter and confusion that we all face with financial matters. In short, our mandate is simple… we care.

With the prospect of a fresh new decade, I hope that you do take some time to reflect on what is important to you and your families. To be clear, I am not proposing a set of resolutions for the New Year. I know my own track record in maintaining resolutions is terrible, and I have observed that there are way more parking spaces at the gym by the end of January! I would suggest that you take time to reflect on some ‘guiding principles’ that are important to you, that will in turn guide your goals and objectives.

Examples of this might be things like:

  • Time with family
  • Time for adventure
  • Time to engage in hobbies or activities
  • Personal growth or development
  • Engagement or personal fulfillment
  • Health and well being

With these guiding principles in place, it is much easier to guide, prod, and nudge your ‘plan’ towards things that really matter to you. If the common themes are ‘time’, then perhaps the goals might be modifying or changing career paths, or reduced hours. This may in turn drive conversations around early retirement or sabbaticals. There may also be specific purchase goals related to a hobby or activity… for example, a chalet purchase if your guiding principle is to engage with your family through a shared activity such as skiing.

In any case, everyone’s goals will be different, but having guiding principles in place can better inform your decisions around your goals and objectives.

They say that perfection is the enemy of progress, and I would agree in that we tend to bail out of our plans when it becomes clear that a straight line to our target isn’t possible. Giving yourself permission for course corrections and temporary rest stops can be vital to keeping the journey alive.

So my advice would be to take time to ‘contemplate’, but don’t forget to move! We are here to help, and we look forward to partnering with you on writing the next chapter of your life story. Let’s make 2020 and the decade to come the best so far.



As a Certified Financial Planner professional (CFP), Dwayne’s mandate is to make sure detailed planning is central to every financial decision that clients make. Whether those decisions involve making a major purchase, running a business, taking on debt, saving for retirement, or protecting loved ones from financial risk, his goal is to make sure clients always have enough, and that they never expose their families to unnecessary financial risks. Dwayne brings a wealth of Consulting experience to his role as an Executive Financial Consultant; being in the financial services industry since 1995 . Dwayne is a member of the FPSC Presidents List, having placed in the top 1% of CFP exam candidates across Canada in 2009.

Is It Time to Lock-In That Variable Rate Mortgage?

Canadians with variable rate mortgages will no doubt have noticed climbing payments over the past year. In 2018, the Bank of Canada raised its overnight lending rate three times, from 1% to 1.75%, leading to a jump in the prime rate of the big banks, which in turn passed those increases on to consumers in the form of higher mortgage interest payments.

Although the interest rate climb seems to have stopped for now, it naturally raises the question of whether consumers should consider switching to a fixed rate mortgage.

Let’s say you have a $1 million home with a $400,000 mortgage and a 3% variable rate mortgage. Your monthly payment, which is likely already up around the $2,000 mark depending on your amortization period, would now cost an extra $160 per month, factoring in the three rate increases last year. And if the BoC raises rates two more times in 2019, which admittedly appears unlikely, then you’ll end up paying an additional $260 per month on top of the 2018 increases.

Survey Says

Most studies have shown that in the long term, you are better off with a variable rate mortgage. However, rising rates can put pressure on a household’s cash flows, especially in Toronto and Vancouver, where housing costs have reached record highs, though they have started to fade a bit this year, particularly in Vancouver where the average composite benchmark price for a home was $1,011,200 in March 2019, down nearly 8% from the same month last year.

Fixed v Variable

The decision regarding fixed versus variable rate mortgage often comes down to something basic – like the homeowner’s appetite for risk. Some people take comfort in knowing their mortgage payment will remain the same every month for the next five years, no matter what happens at the Bank of Canada or in the Canadian bond market. Others can sleep well knowing they will reap the savings if interest rates go down, and don’t worry much about potential rate increases.

Let’s say you’re in a variable rate mortgage rate but have decided to switch to a fixed rate, what happens then? In most cases, the change will require you to break your current mortgage, which comes with a cost. Some borrowers could end up paying an additional three months in mortgage rate interest. However, not all lenders apply this penalty. Some companies, including IG Wealth Management, will waive any fees for borrowers looking to switch from a variable rate mortgage to a fixed rate mortgage of equal or longer term.

And depending on how much time you have left on your variable mortgage, it may or may not be worth doing. If you are in Year 4 or 5, it’s likely easier to wait until the mortgage ends then renew with your preferred product. But, if you are in Year 1 or 2 of your variable rate mortgage, switching to a fixed rate could save you a lot of money. Remember though that you are giving up any potential savings tied a decline in variable rates.

In the end, the decision to go fixed or variable is a personal one, based on a variety of factors. Working with a mortgage professional can help you map out the implications of each option in the context of your long-term financial goals. In addition, your financial consultant can help you work out how your mortgage fits in with your other debts and financial products. Look at the big picture and choose the best option to suit your needs.

Tax Credit Checklist

It’s easy to forget some of the many tax credits available to Canadian tax-filers. But if you want to save money come tax time, you’ll want to ensure that you have taken advantage of these common tax credits for the 2018 tax year.

The Basic Amount

For the 2018 tax year, the basic personal tax credit is $11,809, up slightly from the previous year. Everyone is eligible for this credit. A similar credit is available for an eligible partner and/or dependent with a net income of less than $11,809.

Canada Caregiver Credit

The Canada Caregiver Credit replaced the previous caregiver tax credit, infirm dependent tax credit, and family caregiver tax credit. The credit’s value is determined by the relationship to the dependent being claimed, their income, and eligibility for other tax credits. There’s also a disability credit and many other credits are enhanced for someone with a disability.

Medical Expenses

This amount can be significant and generally you can generate the largest credit by combining expenses on the tax return of a lower earning spouse or by selecting the most advantageous 12-month period for unclaimed expenses (must end in the current taxation year). Certain personal health insurance plan premiums may be eligible; check the Canada Revenue Agency website for a complete list of allowable medical expenses.

Age Credit

This is available to tax-filers aged 65 and older. The federal age amount for 2018 is $7,333. This amount is reduced by 15% of net income exceeding a threshold amount of $36,976 for 2018 and is eliminated entirely when income exceeds $85,863 for 2018.

Of course, this check list is far from complete. Taxes are a complicated business. Consult your professional advisor for more information or assistance with your deductions.

This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Dwayne Rettinger is solely responsible for its content. For more information on this topic or any other financial matter, please contact an IG Private Wealth Management Consultant.

Should Investors Contribute to a TFSA or an RRSP?

Of course, there are differences between investing in a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP). The main difference is how they are taxed. TFSA contributions are made with after-tax money and the funds can be withdrawn at any time tax-free. RRSPs are focused on retirement, as the name suggests. You get an immediate tax deduction for your RRSP contributions as well as long-term tax-deferred growth, but you are taxed when you withdraw from your RRSP, usually in your retirement years.

In some ways, its less important which savings vehicle you choose, as long as you are making regular contributions. Many people choose to wait until the RRSP deadline before making lump-sum contributions to either plan, and while that’s certainly better than forgetting to contribute, regular contributions on a monthly basis are more efficient.

Most investment experts agree that the RRSP is the best retirement savings strategy for most Canadians. To get the most in immediate tax savings and long-term growth from your RRSP, always make your maximum contribution each year. Your RRSP contribution limit for 2018 is 18% of the earned income you reported on your 2017 tax return, up to a maximum of $26,230. For 2017, the upper limit was $26,010. If you are a member of a Registered Pension Plan or Deferred Profit Sharing Plan, your RRSP contribution limit is reduced by the past year’s contributions to those plans. (How much you can contribute this year can be found on your most recent notice of assessment from the Canada Revenue Agency.)

TFSAs are an excellent way to invest your money and get your cash back at any time and for any purpose. With a TFSA, there is no tax deduction for your contributions, but all TFSA investment earnings are tax-free and will not trigger clawbacks on federal tax credits or benefits programs (such as the Guaranteed Income Supplement, Old Age Security, Age Credit, GST Credit, or Canada Child Benefit). The current annual maximum TFSA contribution is $5,500 plus the full amount of any previous year withdrawals. If you don’t use all your TFSA contribution room right away, it accumulates year after year. Fill it up any time you want if you have extra cash on hand. And your TFSA contributions do not affect your RRSP contribution room.

Regular contributions to an RRSP and a TFSA can be the key to a strong financial future. Your financial advisor can guide you on which vehicle is best for you, depending on your age, financials goals and current financial holdings. It’s all part of your financial plan, something else you should be discussing with your advisor.

This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Dwayne Rettinger is solely responsible for its content. For more information on this topic or any other financial matter, please contact an Investors Group Consultant.


Post-retirement tax planning for the lifestyle you want

Post-retirement tax-planning is vital to maintaining the retirement lifestyle you want for all the years of your retirement. But even if you`re already past the `post`, it`s not too late to implement tax saving strategies that work for you – starting with these income-protecting objectives:

  • Always take full advantage of all the direct tax deductions available to you.
  • Keep your net income and taxable income low enough to avoid such potential pitfalls as the Old Age Security (OAS) clawback or losing out on the age credit and possibly the GST/HST credit.
  • Ensure that your monthly cash flow is not eroded by increases in the cost of living and that your investments will last a lifetime.

In keeping with these objectives, here are some other important post-retirement tax-reduction and income-protection strategies:

  • Plan Registered Retirement Income Fund (RRIF) withdrawals: Withdrawals from investments held in your RRIF are fully taxable – so manage your taxable income by withdrawing only amounts that are required.
  • Reduce taxes through tax efficient asset allocation: Keep fully-taxable, interest- generating investments inside a tax-deferred Registered Retirement Savings Plan (RRSP) or RRIF as long as possible while keeping assets that are more tax-efficient – those that generate capital gains or Canadian dividends – outside your registered plans.
  • Take full advantage of all available tax credits and deductions: Don’t forget the age credit for those aged 65 and older, the pension income credit and medical expense credit.
  • Reduce your taxes by sharing Canada or Québec Pension Plan (CPP/QPP) income with your spouse: When your spouse has a lower CPP/QPP entitlement and is in a lower tax bracket.
  • Contribute to a spousal RRSP: You must convert your RRSP to a RRIF no later than December 31 of the year in which the owner attains age 71.

These and other income-protecting and tax-saving strategies – like investing in a Monthly Income Portfolio (MIP) that can protect your income against inflation and generate stable and reliable income distribution (outside your RRIF or RRSP) and potentially higher long-term growth – will help ensure that you`ll continue to have the income you need for all your retirement years. Talk to your professional advisor about the post-retirement financial strategies that make the best sense for you.

This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities.  Dwayne Rettinger is solely responsible for its content.    For more information on this topic or any other financial matter, please contact an Investors Group Consultant.


Checking In On Your Year-End Financial Checklist

As Valentine’s Day fades to Family Day followed by St. Patrick’s Day and then Easter, it’s easy to understand how time can slip through our fingers.

As 2017 came to a close, you may have been one of those individuals who took the opportunity of the year-end to assess your finances and perhaps come up with a financial plan for 2018.

Like any fitness plan initiated with gusto, the question you need to ask now is: is your financial house still in order some six weeks into the new year?

Your year-end financial checklist was a doozy but the numbers tell the real tale. Have you let your spending run away from you a bit? Are you not on top of savings like you had planned just a few short weeks ago? Does tackling that credit card debt still make you want to bury your head in the sand?

We all know the road to headache can be paved with good intentions. More generally, it’s important to regularly check in throughout the year and assess whether the financial goals you established for you and your family still make sense. Is your budget realistic? Have you maxed out your RRSPs? Assess your various insurance policies and make sure your insurance coverage is not an overkill or, on the other side, too little to meet you and your family’s needs.

As an additional note, it’s recommended that you get experienced advice on those obscure areas that lurk in your financial house. For example, you might need to speak with a tax professional to iron out details regarding what receipts to keep and whether you are doing the correct preliminary work to take advantage of potential tax deductions and credits. Moving expenses, child-care costs, tuition fees, medical expenses and charitable donations all provide tax implications you should know about.

Controlling your spending and making sure that you are on track with your financial plan is never easy. Like a weight loss and fitness plan started on January 1st, it’s easy to get distracted by temptation and become discouraged. Don’t let the numbers get you down. Understand the importance of having a sound financial plan and keep in mind that financial advisors are available to guide you in the right financial direction.

This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Dwayne Rettinger of Investors Group Financial Services Inc. is solely responsible for its content. For more information on this topic or any other financial matter, please contact an Investors Group Consultant.

Millennials Deserve Credit for Saving for Retirement Despite Barriers

Every generation faces their own particular financial circumstances and challenges.  And as the millennial generation begins to occupy a majority of the Canadian workforce, it’s worthwhile to study how they are doing financially, the financial goals they prioritize and the unique financial challenges they face.

Millennials have in fact been more challenged than any other recent generation – Gen Xers or Baby Boomers – to accumulate wealth. Their net wealth has changed little since 1999 – up by just $1,000. But their debt has skyrocketed by $20,000. That translates into $20 of debt for each additional dollar of wealth millennials have accumulated. Gen Xers, by comparison, have taken on 75 cents in debt for every dollar they have accumulated.

One would think that a generation who is, on average, facing more financial challenges wouldn’t be putting what they have into retirement savings. With that said, 67.9 percent of millennial households are still managing to save for retirement, Statistics Canada data shows.

It is the older millennials, in their early to mid 30s, along with Gen Xers, who are particularly pressured and are among Canada’s most indebted citizens. They are entering the most expensive time of their lives, as they come up against milestones like establishing or growing their families and taking on home ownership. And they are reaching those milestones a decade later than Baby Boomers, too.

For all the progress they are making at putting aside savings for retirement or other goals, there is still a third of millennials who are not making much headway, and even those who are could probably use some financial guidance.

If you’re among them, here are some places to start.

Intelligently and proactively manage your finances, so you have funds available to put aside for retirement and other long-term needs. Go beyond your assets and liabilities and evaluate your cash flow. This will give you a realistic picture of your overall financial standing and help you identify trouble spots, like ongoing debts.

Budgeting is important, too, and it doesn’t have to be complex. Figure out what is coming in, what is going out, track your costs, and be brave enough to cut costs where you can. Your budget should help you determine what you can afford to “pay” yourself for retirement savings or emergencies. Automating your contributions with each paycheck makes it painless and keeps you from getting caught short.

Finally, work to understand what type of retirement plan will meet your needs.  This is something a financial advisor can give you input on, based on your financial profile and expected circumstances over the long term.

Tax-Free Savings Accounts (TFSA) have become one of the most popular plan options among millennials.  Registered Retirement Savings Plans (RRSPs), which 37.3 percent of millennials have, also have tax advantages in the form of tax-deferred growth and tax credits.

The good news is that millennials are doing better saving for their retirement years despite some substantial hurdles. 

This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities.  Dwayne Rettinger is solely responsible for its content.    For more information on this topic or any other financial matter, please contact an Investors Group Consultant.