What’s your M.E.T.R.? … and other ways “managing income to a tax bracket” can go wrong.
“I try to keep my taxable income under the “X”K combined tax bracket” sounds smart and can make great sense if done correctly, and for the right set of circumstances
Managing your taxable income to a bracket sounds simple but almost everyone I’ve worked so far who is attempting to manage taxable income (even with the help of accountants) is missing some part of the required nuance. It’s tricky stuff, and requires a deep and reasonably comprehensive multi-year understanding of your finances and life.
But first one big caveat, this article is not personalized tax advice, many details and nuances are omitted for simplicity. It’s a framework for how to think about annual taxable income planning from someone who came from outside the personal finance world and has had to learn it (I’m still learning every day).
First in order to manage your income you need some control over it. The degree of control you have over your taxable income varies a lot depending on your personal situation including:
How much cash flow do you need to live on (If you need to spend everything you earn and don’t have other resources taxable income planning will be difficult)?
Are you adding to, repositioning, or withdrawing from your investments?
Does your income naturally vary from year to year and can you earn more/less on demand?
What type(s) of income do you have (investments, employment, business etc.)?
What tax deductions (if any) are available to you
Generally the more of the above are true the more opportunity you will have for taxable income planning. But most Canadians have some opportunity to manage their income through RRSP contributions and eventual withdrawals.
Why might you manage your taxable income if you could?
Canada has a progressive taxable income system, in general lower taxable income that is smoothed across years and more evenly split amongst partners delivers a more efficient result than very high or lumpy income. Consider 2 example families that both earn 400K in total household income over 2 years (all employment income in Ontario and ignoring gov’t benefits for simplicity). Family 1 has one partner earn 400K in year 1 and both partners earn zero in year 2 , family 2 has 2 partners working for 2 years each for 100K/year. Family 2 will pay nearly ~70K less in personal income taxes, leaving more money to live and invest.
I find most clients intuitively understand this part, it’s what gives rise to the desire to do some taxable income planning e.g. avoiding the nearly 54% marginal tax rate on taxable income above ~258K, or the ~5.5% income tax rate jump on income above ~117K. For those who do have significant ability to manage their taxable income there are strong benefits to doing so. The problem is that there are a couple of wrinkles that many DIY tax planning efforts miss notably: Tax treatments of different types of incomes, tax deductions, and income-tested government benefits.
This is a nuanced topic (And I will necessarily leave out a bunch of details) but I’ll do my best to highlight the most common misinterpretations when estimating your tax bracket for income planning purposes. There’s a whole separate set of considerations for what deductions you may be entitled to, and how you might try and legally split income with a partner or stage it over multiple years (also important but not for today!).
Wrinkle 1: Estimating taxable income.
The first complication is that not all types of income are treated the same when calculating taxable income. Employment income and interest income are generally included dollar-for-dollar.
Eligible dividends from taxable Canadian corporations — for example, dividends from public companies such as TD Bank or Enbridge — are treated differently. These dividends are “grossed up” by 38%, meaning that $1.00 of eligible dividends counts as $1.38 of taxable income. This does not mean eligible dividends are necessarily taxed more heavily overall. The gross-up is paired with a dividend tax credit, which is intended to recognize that corporate tax has already been paid. However, that credit reduces tax payable after taxable income has already been calculated. This distinction matters when taxable income itself affects other calculations, thresholds, credits, or benefits.
Realized capital gains (think from the sale of taxable investments or a second property) have 50% of the gain included in taxable income.
So for a hypothetical couple who work together in a family business and where each family member has a 70K salary, 20K of eligible dividends received, 10K ineligible dividends, and a 50K capital gain on the sale of their portion of a jointly owned rental property there’s some nuance to their income estimation. For those following the math it would be 70K + 1.38*20K + 1.15×10K + 50%*50K = 134.1K of income for tax purposes before considering deductions.
There’s then a second step of calculating deductions which serve to reduce taxable income. Two frequent deductions are RRSP contributions, and eligible childcare expenses but there are many more. Deductions reduce your taxable income dollar for dollar (subject to the cap on the deduction). Let’s imagine one of our family members was planning to deduct 10K in RRSP contributions and is eligible to deduct 10K in daycare expenses (only available to the lower earner). Now their taxable income is $114K. They might compare that to the combined tax brackets in Ontario and say, great I’m just under the ~117K cutoff for the next tax bracket (and from jumping to an over 43% marginal tax). And my RRSP deduction is primarily coming from the above 117K tax bracket thus reducing my current tax bill by 43% for every dollar contributed. But even if they managed to do all of the above correct they might still be missing some nuance: Enter income tested government Benefits
Before we go there though between the 2 steps above, someone who is “ballpark estimating” their taxable income can go significantly awry so doing a mid-year check with an accountant or financial planner before making any big moves like triggering capital gains or paying yourself a bonus can definitely help!
Now for Wrinkle 2: Income tested government benefits
The Federal and Provincial Governments offers many generous benefits for taxpayers. Many of these benefits are “Income-tested” meaning that they stop or are gradually “clawed-back” as your personal net taxable income or adjusted family net income (AFNI) exceed certain thresholds. The tricky part is that the cutoffs for these benefits don’t always match up with the tax brackets you may have been planning for, and the way they are calculated varies by benefit as does the benefit year.
A DIY tax planner might compare their 114K personal taxable income that to the combined federal/Ontario tax brackets and say, “Great, I’m just under the roughly $117K threshold where the marginal rate on ordinary income jumps from about 38% to about 43%.” That may be a useful observation, but it still may not tell the whole story. The tax bracket is only one layer. The next layer is whether the same income affects income-tested government benefits, credits, or clawbacks.
The most famous example is the infamous OAS Recovery Tax. For July 2026-June 2027 payments the government will “Claw back” 15% of your OAS payments for every dollar of 2025 personal worldwide net income that exceeds the cutoff of $93,454. So for your next dollar earned above this threshold in addition to personal income tax of ~43% you’d be losing 15% of your OAS benefit. This means your marginal effective tax rate (M.E.T.R) inclusive of government benefits could be ~58% which is even higher than the top combined federal/provincial personal tax bracket. My personal view is that it is good policy not to pay OAS to seniors who don’t need it, but the current system sure does create some strange incentives and tax complications.
Now our dual earning couple above was a long way from retirement, but they do have 3 children under age 6 and are eligible for the Canada Child Benefit which is an income tested benefit based on Adjusted Family Net Income. I’ll save the details for another post but even at ~228K of AFNI they are still entitled to ~$4K/year in tax free Canada Child Benefit Payments. And more interesting is that their Marginal effective tax rate is 8% higher than a simple “tax bracket analysis” would suggest.
Canadians who are most likely to see the the biggest differences in their marginal effective tax-rates and their simple tax brackets are parents with modest incomes, and single income seniors who are close to the OAS Clawback Thresholds.
I find this visual extremely helpful from the CD Howe Report “The Clawback Trap” which shows how M.E.T.R.s can exceed 50% for 2 child modest income households (Whom traditional financial advice would say never contribute to your RRSP when you are in a low tax bracket). Link to the report here: https://cdhowe.org/publication/the-clawback-trap-how-canadas-benefit-system-can-undermine-work-and-saving/
There are many other benefits, especially if you will have a modest family or personal income (see above the 40K-80K) AFNI range is pretty severely taxed on a M.E.T.R. basis across Canada for parents.
Finally, life changes, and financial and tax-planning should be a long-term focused process that anticipates a certain amount of uncertainty. It doesn’t do much good to perfectly fit into a desired tax bracket for 3 years only to blow past it by orders of magnitude to cover a major expense in the 4th year. This is where wholistic multi-year planning can make a big difference.
All this is to say that DIY tax planning is helpful, but it’s rarely as simple as “I just pay myself $xK to stay below the $yK tax bracket”.
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Finally if you think annual taxable income planning might be appropriate for your situation, but I’ve successfully talked you out of doing it without some help, I am currently including annual taxable income consultations for all of my ongoing advice-only financial planning clients you can book a complimentary introductory video call here.