Effective Tax Rate Concept

RazorPlan calculates a clients Effective (or Highest) Tax Rate as the highest percentage of tax paid on any one dollar earned. This includes the calculation of Age Credit and OAS clawback.

For pre-retired individuals, this concept is easy. It is no more complex then the client’s marginal tax rate. However, when analyzing a retired client who is receiving full Old Age Security and Age Credits, we need to also account for any applicable clawbacks. For example, in Alberta, OAS is clawed back at 15% in the 36% bracket. When combined, this creates an Effective Tax Rate of 51% for a client earning $89,401. As income increases to $114,815, OAS is fully clawed back and the Effective Tax Rate drops back down to 36%.

When analyzing a client’s retirement, the discussion around taxation and credit clawback is an important one. Outlining years where potential clawback can increase a client’s Effective Tax Rate will introduce planning opportunities and discussions around cash flow management.

*View the Client and Spouse/Partner’s Effective Tax Rate using the Taxation Ledger.