CPP, EI and Tax Rates for 2012

It is a new year and the new tax rates are in.  There were not a lot of changes from last year.  Most money ranges and limits moved with the government's inflation index.

Federal Income Tax Rates	2012	2011
Basic Personal Exemption	$          10,822	$          10,527
15% on the first:	$          42,707	$          41,544
22% on the next up to:	$          85,414	$          83,088
26% on the next up to:	$        132,406	$        128,800
29% on the income over:	$        132,406	$        128,800
Alberta Income Tax Rates	2012	2011
Basic Personal Exemption	$          17,282	$          16,977
Tax rate	10%	10%
CPP	2012	2011
Maximum Pensionable Earnings	$          50,100	$          48,300
Basic Exemption	$            3,500	$            3,500
Rate	4.95%	4.95%
Employee & Employer Max.	$            2,307	$            2,218
Self Employed Max.	$            4,613	$            4,435
EI	2012	2011
Maximum Insurable Earnings	$          45,900	$          44,200
Employee Rate	1.83%	1.78%
Employee Max.	$               840	$               787
Employer Rate	2.56%	2.49%
Employer Max.	$            1,176	$            1,101

2011 RRSP contribution deadline is February 29, 2012. The contribution limit is $22,450, although if you have not contributed to the maximum in past years you have additional contribution room. You can contribute to RRSPs until you turn 71 when RRSPs must be converted into something else like a RRIF (Registered Retirement Income Fund).  The limit for 2012 is $22,970.

2012 TFSA contribution room is $5,000. If you haven't contributed in past years you can contribution up to $20,000.

Tax Free Savings Accounts (TFSA) Info

The Tax-Free Savings Account (TFSA) is a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs. The TFSA could be best described as a Tax Free Investment Account because you can invest in stocks, term deposits, and mutual funds as well as applicable savings accounts.

The TFSA was started in 2009 allowing an investment of up to $5,000 per Canadian who is 18 years old or older.  The $5,000 amount is cumulative, meaning that if you haven't invested in a TFSA before, as of 2011 you could invest up to $15,000 ($5,000 for each investible year).  In January, 2012 you will be able to invest up to $20,000.

How the Tax-Free Savings Account Work:

RRSP Withholding Tax

A very important thing to remember is that contributions to Registered Retirement Savings Plans (RRSPs) are tax deductible.  That means that you in the year you contributed to your RRSP, you were able to claim less income, thus reducing the taxes you paid.  This is a major incentive by the government to help people save money by helping them reduce personal income taxes at the same time.

The general plan is that you will keep that money growing in your RRSP, tax deferred, until you start making withdrawals in retirement.  Notice that RRSP investments and growth are tax deferred, not tax free, meaning you will have to pay taxes on the money as you withdraw it from your RRSP.

The Question - So how much tax do you pay on RRSP withdrawals?
There are 2 parts to the answer for this question.   The first part is the withholding tax, or the amount that the Federal Government requires financial institutions to withhold when you take your money out.  In all provinces, except Quebec, the schedule is as follows:

$ Amount                    Withholding tax                Example
The first $5,000                10% is withheld     $5,000 - 10% ($500) = $4,500 cash
$5,001 to $15,000             20%                     $10,000 - 20% ($2,000) = $8,000 cash
$15,001 and up                 30%                     $20,000 - 30% ($6,000) = $14,000 cash

The second part of the answer is your personal income tax rate.  Because you reduced your taxable income by the amount of your RRSP contribution in the year you made the contribution, your RRSP withdrawal will be counted as be taxable income in the year you withdraw the money.  If you make a withdrawal before retirement, it is likely that your income tax level will be higher than if you withdraw during retirement, thus you will pay more tax.

For example, in Alberta, if you are making $50,000/year, any additional regular personal income will be marginally taxed (federally and provincially) at about 32%.  This means that a RRSP withdrawal will be taxed at 32%.  So if your withdrawal is $5,000, you will pay about (32% of $5,000) $1,600 in taxes.  You already had a 10% withholding tax applied, so at year end you will pay the following: $1,600 (taxes) less $500 (withholding tax already paid) = $1,100 still owing.

My recommendation is to be very careful about withdrawing RRSPs without a long term plan.  Even in retirement the taxes on withdrawals from registered plans can be quite onerous, but I will speak to that another day.  Jerry

2011 Personal Tax Levels

As we have recently started 2011, it is always good to plan how to protect your money from taxes.  The following is some tax information that you may want to review for tax planning purposes throughout the year.

The Federal Income Tax rates for 2011 are as follows:
•15% on the first $41,544 of taxable income
•22% on taxable income between $41,544 and $83,088
•26% on taxable income between $83,088 and $128,800
•29% of taxable income over $128,800
The Federal Basic Personal Amount in 2011 is $10,527

The Alberta Income Tax rate is 10% of taxable income.  The Alberta Basic Personal Amount is $16,977.

CPP Info
Maximum Pensionable Earnings:            $48,300
Basic Exemption                                     $3,500
Rate                                                             4.95%
Employee & Employer Maximum            $2,217.60
Self Employed Maximum                       $4,435.20

2010 Personal Tax Info

We are approaching the end of another year, which means Christmas is close, but so is the 2010 financial year.  The following is some tax information that you may want to review as the year draws to a close.

The Federal Income Tax rates for 2010 are as follows:
•15% on the first $40,970 of taxable income
•22% on taxable income between $40,970 and $81,941
•26% on taxable income between $81,941 and $127,021
•29% of taxable income over $127,021
The Federal Basic Personal Amount in 2010 is $10,382

The Alberta Income Tax rate is 10% of taxable income.  The Alberta Basic Personal Amount is $16,825.

Important 2010 Finance Info

With 2010 arriving, we are now under the 2010 tax levels.  The following are a few Federal tax numbers you may want to know about:

 - Basic Personal Income Exemption Amount of $10,382 (increase of $62)
 - Tax rate of 15% from $10,382 to $49,970 (increase of $244)
 - Tax rate of 22% from $49,970 to $81,941 (increase of $489)
 - Tax rate of 26% from $81,941 to $127,021 (increase of $757)
 - Tax rate of 29% on above $127,021

Tax Free Savings Account

The Tax-Free Savings Account (TFSA) is a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs. The TFSA complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).

How the Tax-Free Savings Account Works

• A limit of one TFSA per person. Similar to RRSPs, this account is reported to the Canada Revenue Agency.
• Contributions to a TFSA will not be deductible for income tax purposes but investment income, including capital gains, earned in a TFSA will not be taxed, even when withdrawn.
• Unused TFSA contribution room can be carried forward to future years.
• You can withdraw funds from the TFSA at any time for any purpose.
• The amount withdrawn can be put back in the TFSA at a later date (not within the same calendar year) without reducing your contribution room.
• Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits.
• Contributions to a spouse’s TFSA will be allowed and TFSA assets can be transferred to a spouse upon death.