Here are the rates from the E&Y Tax Calculator, as updated to include legislation to May 8, 2008.
Clawbacks are not included; I am hopeful that at some point I will be able to get some authoritative data on the effects of clawbacks, but have not found anything credible … please contact me if you do know of any credible public sources!
| Investors | Taxable Income | Marginal Rate on Interest |
Marginal Rate on Eligible Dividends |
Equivalency Factor |
| Widows & Orphans | $30,000 | 21.05% | 0.00% | 1.27 |
| Professionals | $75,000 | 39.41% | 13.81% | 1.42 |
| Plutocrats | $150,000 | 46.41% | 23.96% | 1.42 |
These figures are not much different from the 2006 numbers. The top marginal rate on eligible dividends is expected to increase to 26.7% in 2012; this would decrease the equivalency factor to 1.37. But frankly, I take estimates of future taxation rates with a grain of salt – we have no way of knowing what will be politically convenient next month, let alone four years off.
I love a challenge and looked at this in 2007 using 2006 marginal tax rates. It is a very complicated calculation, especially for couples which have lots of income splitting possibilities to minimize OAS and total tax.
Nevertheless, here is the general idea about OAS claw back for a single filer:
– OAS is Income to the recipient (+ve)
– OAS is taxed as income (-ve)
– OAS is clawed back at a 15% rate when taxable income is greater than about $62,000 (-ve). However, since the claw back removes it from being taxable income (+ve), the INCREMENTAL tax rate during OAS clawback = 15%*(1 – MTR) where MTR is the marginal tax rate on income.
The clawback occurs at MTR 33% to 43%, so the Incremental tax rate is about 10 points and 8 points, respectively.
HOWEVER, OAS is offset to some degree by age credits (+ve) that kick in at the same time. Net, for the 2006 tax year I estimated total tax was lower while receiving OAS if taxable income was less than $73,000 and total tax was higher if income was higher.
We can go a little further:
An approximate equation for the Marginal Dividend Tax Rate is:
MDivTR = 1.45*(MTR – Fed&Prov Tax Credits of approx 26% for 2008; choose your year) + [if OAS applies, 1.45*15%*(1-MTR) ]
Most of the problem with OAS clawback occurs between $80,000 and $105,000 (rough 2008 numbers), where the MTR = 43.4%. The approximate solution is:
Dividend Tax Rate = 1.45 * (43.4% – 26%) = 25.2%
in the presence of OAS clawback: 25.2% + 1.45*15%*(1-43.4%) = 37.5%
A useful site for Canadian tax calculations is:
http://www.taxtips.ca/dtc/enhanceddtc.htm
where I have flagged the federal situation for the next couple of years.
Blog on!
OK, but what we’re really interested in is the Equivalency Factor … the scenario is that we’re standing around, with base income of $80,000 and we have $10,000 of uninvested capital that needs to be put to work.
So how about:
MIntTR = MTR + [if OAS applies, 15%*(1-MTR)]
= 43.4% + 15%*(1-43.4%)
= 43.4% + 15%*56.6%
= 43.4% + 8.5%
= 51.9%
And:
Equivalency Factor = (1-MDivTR) / (1-MIntTR)
= (1 – 37.5%) / (1-51.9%)
= 62.5% / 48.1%
= 1.3
Does this look right to you?
DISCLAIMER: Note that I never give tax advice to clients and that I have no special claim to tax expertise. I’m only curious.
prefhound left a comment which I deleted accidently while spam-cleaning…JH
James: what are you doing up at 1:24 am?
Math looks OK, so the dividend equivalency factor does not change much in the presence of OAS.
A few folks may have MTR = 33%, for which the OAS dividend equivalency factor is: 1.32
I wonder if the boffins in the Federal Finance Department knew this all the time…
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