Why is the financial industry using the wrong marginal tax rates?


Before answering this question, I should ask first whether you know that there are two types of marginal tax rates in Canada. There is the “POSTED” marginal tax rate which is what is used by the financial industry and what is shown on tax sites such as TAXTIPS http://www.taxtips.ca/marginaltaxrates.htm. But these marginal tax rates only apply to the wealthy or Canadians with a high level of income. For Canadians earning an average or low level of income, their “REAL” marginal tax rates is entirely different than the Posted marginal tax rates because it is calculated in an entirely different manner.


There are no shortcuts in calculating real marginal tax rates. It varies with age, provincial residency, level of income, marital status, and number of children… REAL MARGINAL TAX RATES CAN REACH LEVEL AS HIGH AS 95%!!!


This is where you would expect me to show the truth to you. I am sorry I am not going to do it. When my child do something wrong, I have a choice. I can step in and correct the mistake for him or I can point him in the right direction and let him figure it out and I believe the financial industry needs to figure it out and learn that to believe that something is right because everyone believes it is, forms the basis of religion and faith and not science and knowledge. I think consumers expect financial advisors to use the latter in their financial advice.


So where do you start in figuring it out. This is easy. I have developed the tools to start you on this path of marginal tax rates awareness at:


Ontario: https://play.google.com/store/apps/details?id=com.irlont.irltaxont

Quebec English: https://play.google.com/store/apps/details?id=com.irlque.irltaxque_e

Quebec French: https://play.google.com/store/apps/details?id=com.irlquef.irltaxque_f


Nova Scotia: to come today


I know. I know… $5.99 is a lot of money but this money is needed to make the applications for the other provinces and to make the applications available on IPHONE. This cost money and I have spent enough of it to correct a mistake that is not mine and which is the industry’s mistake.


Are these real marginal tax rates really important?


Yes they are and to show this, in the application, I have used a simple example. I have used the decision between investing in a TFSA or a RRSP. Again if you google this, it is unbelievable the number of published texts that provide the wrong information. The belief is that a TFSA is better for people with low marginal tax rate. Wrong! A person who has a real marginal tax rate of 95% and who contributes to a TFSA just lost $1900 for a $2000 contribution!!!


I have given the wrong advice to my clients and cost them money; should I start running for the hills or should I call the provider of my error and omission insurance?


You did cost money to your clients but no harm done in most cases. The money is still there. To know what to do you just have to first figure out what is the real marginal tax rate of your client. Then you sit with these clients, tell them you are sorry but the good news is that by transferring the TFSA money in an RRSP, based on their high real marginal rate, you will reduce the tax they owe and increase their real take home income by 10, 15,20,25%… You may make 2016 the best financial year for them…

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