Whenever there is a change in government, it is usually accompanied by changes to tax measures. This article will summarize the key tax initiatives we may see in the near future as a result of the new Liberal majority government in Canada.
Tax Rates
The Liberals plan to increase taxes for high-income earners and to cut taxes for their newly-defined "middle class" in Canada. The new government plans to reduce the federal tax rate to 20.5% from the current 22% on the middle-income tax bracket of $44,701 to $89,401[1]. To facilitate this tax cut, the party has promised to create a new tax bracket capturing taxable income over $200,000 a year, which will be taxed at 33%. The current highest tax bracket, which taxes income over $138,586[2] at 29%, will be maintained for income between $138,586[3] and $200,000. This increase will push the top marginal tax rate in Canada to over 50% for some provinces. Ontario would be expected to have a combined top marginal tax rate of approximately 53.53%. We expect these changes will be implemented retroactively, effective January 1, 2016, once proposed in the 2016 federal budget.
The following chart summarizes what the combined federal and Ontario highest personal marginal tax rates could be on the various sources of income if the expected tax rate changes are implemented.
| Ordinary Income | Capital Gains | Canadian Dividends Eligible | Canadian Dividends Non-eligible | |
| Pre-Liberal government | 49.53% | 24.76% | 33.82% | 40.13% |
| Expected under Liberal government | 53.53% | 26.76% | 39.34% | 45.33% |
Family Benefits
The Liberal government also plans to significantly transform the Universal Child-Care Benefit Program ("UCCB") and Canada Child Tax Benefit Program ("CCTB"). Under the current UCCB program, a family receives $160/month for each child under the age of six, and $60/month for each child aged six through 17. Currently, these payments are received irrespective of a family's income level. The current CCTB is an additional non-taxable amount paid monthly to help eligible families. The amount of this additional payment varies depending on a family's income level.
Both of these programs are expected to be replaced by the new Canada Child Benefit ("CCB"). This new program is aimed at giving more money to lower-income families, while ensuring high-income families do not receive these benefits. The new benefit will be entirely income tested, meaning it will be fully dependent on a family's income level. It is expected that all families with children that have annual incomes below $150,000 will receive more in monthly child-benefit payments than under the current programs. The CCB will start at $6,400 per year, tax-free, for each child under the age of six, and $5,400 per year, tax-free, for each child between the ages of six to 17. The benefit will slowly phase out as family income rises. Family income will be calculated the same way as it is now, every July, based on the family's previous year's income.
For example, a two-parent family, earning an annual income of $90,000, with two children who are four and eight years old will get approximately $490 every month tax-free. Over an entire year, this CCB will provide $5,875 in benefits to this family.[4]
The income-splitting initiative for families, known as the "Family Tax Cut," is also likely to be retracted. This program allowed eligible couples with children to shift income from the spouse with higher earnings to the spouse with lower earnings, saving up to a maximum of $2,000 in taxes annually. The Liberals suggest that this program fails to achieve what it was intended for as it benefits high-income families instead of single-parent and low-income families within the same tax bracket. The cut to the middle tax bracket and the introduction of the CCB program are intended to offset any benefits that were created by the Family Tax Cut.
Tax-Free Savings Account ("TFSA")
The Liberal government also plans to scaledown the TFSA annual contribution limit by returning it to $5,500 from the $10,000 limit that was introduced in the 2015 federal budget. There is some speculation that this change would be made retroactive to 2015; however, this would place a costly amount of administrative burden on the Canada Revenue Agency, TFSA holders, and TFSA providers. It is more probable that a change to the TFSA limit would be made effective January 1, 2016, at the earliest.
Age Limit for Old Age Security ("OAS")
The Liberal government is also projected to reinstate the eligibility age for the OAS and Guaranteed Income Supplement to 65. The Conservative government had introduced a plan that was aimed at raising the eligibility age to 67 gradually over time with full implementation by 2029.
Education Credits
The Liberal government is also expected to implement changes to the education and textbook tax credits. Currently, the federal education tax credit is a non-refundable credit worth up to $720 of annual tax savings for a student who attends school full time for 12 months and up to $216 of annual savings for a student who attends school part time for 12 months.
The textbook credit is also a non-refundable credit worth $117 per year for full-time post-secondary education and $36 per year for part-time. The Liberals suggest that these credits only provide a benefit to students at the end of the year and are not properly targeted at students from low- and middle-income families. The Liberals promise to offer instead non-repayable grants upfront, which would give money directly to students who need it. No details have been released yet regarding these proposals.
Canada and Provincial Pension Plans
The Liberal platform also proposed working with provinces to bolster the current Canada Pension Plan benefits. The effect of this proposal is yet to be seen as no official changes have been announced. This proposal would likely impact the new Ontario Retirement Pension Plan ("ORPP"), which was planned to begin in 2017.
Summary
Lower-income individuals and lower-income families with young children stand to benefit the most from the personal rate changes and revamped family credits while (generally) not being affected by reductions in the TFSA contribution limits. Individuals earning an annual income of over $200,000 can expect to pay significantly more tax annually. The exact nature of these tax changes is still unknown, but if you would like to discuss these changes or options to reduce their impact on you, please contact your Crowe Soberman advisor today.
[1] Indexed to $45,282 to $90,563 for 2016.
[2] Indexed to $140,388 for 2016.
[3] $140,388 for 2016.
[4] https://www.liberal.ca/files/2015/05/Fairness-for-the-Middle-Class.pdf
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