This year, most of us will have more money in our pockets…thanks to the Liberal government’s tax cut. As some of you may already know, the Prime Minister wasted no time in implementing his campaign promise to reduce the rate for the middle-income bracket (income between $45,282 to $90,563) from 22 percent to 20.5 percent. The Canada Revenue Agency has already incorporated the new rates in its Payroll Deduction On-line Calculator for employers so some of you may have noticed some difference in your pay this month. However, the majority of you will be disappointed as the impact of the change is not exactly exciting. According to the government, nine million people will benefit from this tax change, with the average reduction being about $330 for an individual. If you’re on a bi-weekly payroll, your take home pay will reduce by approximately $7 per pay period on the low end to $30 per pay period on the high end depending on your annual income. If you fall just outside of this tax bracket, there may be opportunities to tax plan to benefit from this cut in 2016.
The middle class tax cut is just one of the changes announced. Other tax changes that could potentially impact you in 2016 include:
Tax Increase on income over $200,000
To compensate for some of the lost tax revenue from the tax cut to the middle class, people making over $200,000 will have to pay more in taxes to the government. The Liberal tax plan would create a new 33% federal income tax rate for earnings above $200,000. This is 4% more in 2016 compared to 2015. With provincial rates added, earners in this category will end up with top marginal rate above 50% in some cases.
Bear in mind that this top rate only applies to your marginal income over $200,000. For example, if you make $250,000, only $50,000 will be taxed at say, 50% while the remaining will be taxed at a lower rate. Even with this, the impact can be substantial so there may be opportunities to tax plan if you fall in this category.
Corporate tax changes
Under our tax system, corporate tax rates are generally lower than personal tax rates. This difference could lead to tax deferral opportunities when investments are held in a private corporation. To reduce these tax deferral opportunities, a refundable tax mechanism is in place where certain investment income is taxed in a corporation rather than directly in the hands of an individual. The increase in the top federal personal tax rate to 33% would create an incentive to hold investments in a private corporation in the absence of adjustments being made to this refundable tax regime. Therefore, the following changes are proposed to ensure that the tax system with respect to certain investment income continues to operate as intended:
Refundable additional Part I tax payable — A Canadian-controlled private corporation is subject to an additional refundable tax on its investment income at a rate of 6 2/3%. This rate will be increased to 10 2/3%, effective January 1, 2016. For taxation years that straddle the effective date, the rate increase will be prorated according to the number of days in the taxation year that are after 2015.
Refundable Part IV tax payable — Privatecorporations are subject to tax on assessable dividends (i.e. portfolio dividends) received from an unconnected dividend payer at a rate of 33 1/3% (with certain adjustments for losses). The rate will be increased to
38 1/3% for taxation years that end after 2015. For taxation years beginning before 2016, assessable dividends will be taxed at 33 1/3% if they are received before 2016, and at
38 1/3% if received after 2015.
Dividend refunds — Under the refundable tax mechanism, the payment of dividends by private corporations may generate a refund. Currently, the dividend refund is equal to the lesser of 33 1/3% of all taxable dividends paid in the year by the private corporation and the corporation’s pool of refundable taxes (known as “Refundable Dividend Tax on Hand” or “RDTOH”) at the end of the year. When determining the dividend refund, the rate of33 1/3% will increase to 38 1/3%, effective for taxation years that end after 2015. For taxation years beginning before 2016, the increase in the dividend refund rate is prorated according to the number of days in the taxation year that are after 2015.
Further adjustments are also proposed that impact the calculation of the dividend refund, and in particular in determining RDTOH. With an increase in the additional Part I refundable tax on investment income as noted above, the refundable portion of Part I tax will increase from 26 2/3% to 30 2/3% for purposes of determining a corporation’s RDTOH. As well, there are proposed changes that will impact the determination of a corporation’s RDTOH where the corporation has certain foreign source income.
Tax-Free Savings Account
Contributions to a Tax-Free Savings Account (TFSA) do not give rise to a tax deduction and when money is withdrawn, the accumulated contributions and income received are not taxable. Each year, taxpayers are entitled to a specified annual contribution limit. Earlier this year, the former Conservative government increased the TFSA annual contribution limit from $5,500 to $10,000 for 2015. As promised in the Liberal’s election platform, the new government has moved forward with its motion to reverse that increase. The TFSA annual contribution limit will be $5,500 for 2016, and will be indexed in subsequent years. Note that the TFSA annual contribution limit for 2015 remains at $10,000.
Family tax cut of $2,000 eliminated
Family tax cut was introduced by the Harper government for families who have children under the age of 18 to split the income and save tax up to a maximum of $2,000. Some families benefited from this tax cut in 2015. The Liberal government has now eliminated this benefit and therefore, it is not available in 2016.