Child care expenses – Effective for the 2015 tax year, the maximum amounts that can be claimed for the Child Care Expense Deduction will increase as follows:
- For children under the age of seven: from $8,000 to $9,000
- For children aged seven through 16: remains at $5,000
- For children who are eligible for the Disability Tax Credit: remains at $11,000
Children's Fitness Tax Credit – Fees eligible for the Children's Fitness Tax Credit increased to $1,000 in the 2014 tax year. Effective for the 2015 tax year, the tax credits will become refundable.
Trusts and estates – Starting in 2016, the graduated tax rate applicable to a testamentary trust created by an individual's death will be replaced with the highest personal income tax rate – 29 per cent federal rate plus any provincial tax rates – if the testamentary trust has been in existence for more than 36 months, subject to certain exceptions. The graduated tax rate will continue to apply for trusts having beneficiaries who qualify for the federal Disability Tax Credit. Further, testamentary trusts and grandfathered inter vivos trusts will be required to have taxation years ending on December 31.
Be aware of proposed changes which deem taxable capital gains that arise in spousal trusts, joint spousal trusts, alter ego trusts or self-benefit trusts to be payable to the deceased individual in the year of his or her death.
Small business tax rates – The 2015 federal budget announced a gradual reduction in the small business income tax rate to nine per cent from 11 per cent. The small business rate will decrease to 10.5 per cent on January 1, 2016; 10 per cent January 1, 2017; 9.5 per cent on January 1, 2018; and finally, nine per cent on January 1, 2019.
Tax-Free Savings Account (TFSA) – The 2015 federal budget increased the annual limit of contributions to $10,000 from $5,500, effective for 2015 and future tax years. However, the newly elected Liberal government has proposed to reduce the limit back to $5,500 in the coming years.
Small business rate and thresholds – The threshold in Manitoba will increase from $425,000 to $450,000 on January 1, 2016, while the threshold in Nova Scotia stays the same at $350,000 as of January 1, 2016. The federal small business deduction clawback is extended to Ontario for taxation years ending after May 1, 2015. The 2015 budget proposed a reduction in the general corporate income tax rate for active business, investment and manufacturing and processing ("M&P") income from 11.9 per cent to 11.5 per cent, beginning in 2017. New Brunswick's small business income tax rate has decreased from 4.5 per cent to four per cent, effective January 1, 2015.
Personal income tax – Starting in 2015, the top Ontario personal tax rate before surtax of 13.16 per cent is applicable to income over $220,000, down from $514,000, while the personal tax rate increases from 11.16 per cent to 12.16 per cent before surtax on income between $150,000 and $220,000. The British Columbia personal tax rate increased from 14.7 per cent to 16.8 per cent for 2015 on income over $150,000. New Brunswick's 2015 budget introduced two new personal income tax brackets effective January 1, 2015; individuals with income between $150,000 and $250,000 are subject to a 21 per cent tax rate. Individuals earning more than $250,000 are subject to a 25.75 per cent tax rate.
Please note, however, that the new Liberal government has promised increases to the highest marginal tax rate. Please see the changes highlighted in the Liberal Update below to see the potential tax rates for 2016.
Back-to-back loan – Where a taxpayer has a debt owing to a third-party intermediary and a non-resident person uses his or her property to secure the debt – to circumvent the application of the thin capitalization rule and the Part XIII withholding tax – the taxpayer will be deemed to owe an amount to the non-resident person. The new anti-avoidance rules will be effective for taxation years commencing after 2015.
Immigration trusts – Effective January 1, 2015, an immigration trust will be subject to tax on its worldwide income.
Foreign Income Verification Statement (Form 1135) – New streamlined reporting
- Recent changes to the T1135 Form have increased the compliance burden on taxpayers to report foreign investments.
- The 2015 budget proposed to simplify foreign reporting for taxation years that begin after 2014.
- If the total cost of a taxpayer's specified foreign property is < $250,000 throughout the year, the taxpayer can report the property under a new simplified foreign asset reporting system. This new streamlined form is currently being developed by CRA.
- The current reporting requirements will apply to taxpayers with specified foreign property that have a total cost of $250,000 or more at any time during the year.
Dividends or salaries – An owner-manager must determine the most tax effective salary-dividend mix that minimizes overall taxes for the corporation and the relevant individuals. The owner-manager must consider personal marginal tax rates, the impact of alternative minimum tax (AMT), the corporation's tax rate, RRSP contribution room ($140,945 of earned income in 2015 is required to maximize RRSP contribution in 2016), provincial health and/or payroll taxes, Canada Pension Plan (CPP) contributions and other personal deductions and credits which may be available:
- If personal cash requirements are low, consider retaining income in the corporation to obtain the tax deferral as corporate rates are lower than personal rates.
- Be aware that distributing dividends that trigger a refund of refundable tax on hand does not necessarily provide a tax benefit to the shareholder, if the shareholder is subject to personal dividend tax at a rate which exceeds the corporate dividend refund rate of 331/3 per cent.
- Ontario residents: For 2015, the top provincial personal tax rate of 13.16 per cent will apply to taxable income exceeding $220,000 and 12.16 per cent on income between $150,000 and $220,000. Tax savings can be achieved by deferring the receipt of bonuses or dividends until income is below the high income tax threshold. It is intended that the personal tax rate increase will be eliminated once the Ontario budget is balanced. Based on current estimates, the budget is expected to be balanced in 2017 or 2018.
- British Columbia residents: British Columbia's personal tax rate is 16.8 per cent on taxable income over $150,000 for 2015. The tax rate is expected to decrease to 14.7 per cent in 2016.
Qualified small business corporation share (QSBC share) status – A sale of QSBC shares will be eligible for the lifetime capital gains exemption of up to $813,600 in 2015, with the limit indexed for future years. Among other criteria, to maintain the QSBC share status, a corporation needs to have substantially all of the assets of the business used in an active business carried on primarily in Canada. Excess cash and passive investment assets may jeopardize the QSBC share status. A cumulative net investment loss (CNIL) balance as well as a prior year claim of an allowable business investment loss (ABIL) may limit the individual taxpayer's ability to claim the capital gains exemption on a sale of QSBC shares. Receiving dividend and interest income instead of a salary will reduce the CNIL balance, and in turn help to preserve access to the capital gains exemption.
Scientific research and experimental development (SR&ED)
- Claims for SR&ED expenditures and relevant incentives (i.e. investment tax credits) are due 18 months after the corporation's year-end. These claims cannot be filed late.
- Where a CCPC's taxable income, on an associated group basis, exceeds certain thresholds, the corporation may not be able to access the higher SR&ED investment tax credit (ITC) rate and the ITC will not be refundable. The ITC limitations will also be applicable in situations where a Canadian Controlled Private Corporation's (CCPC's) taxable capital for federal purposes, on an associated group basis, exceeds certain limits. Consider paying a bonus in order to reduce the current year's taxable income to access the higher ITC rate.
Over recent years there were several changes to the SR&ED incentives program:
- Capital expenditures incurred after January 1, 2014 are no longer included in the calculation of eligible expenditures or ITCs.
Proxy overhead amount
- The proxy was reduced from 60 per cent to 55 per cent for 2014 and future years.
Investment tax credits
- There is a basic and enhanced tax credit for SR&ED purposes. The basic credit is now 15 per cent and the enhanced credit is 35 per cent (only for CCPCs, up to a maximum of $3,000,000 of qualified SR&ED expenditures).
Remuneration accruals – A bonus accrued at year-end needs to be paid within 179 days after the year-end, and applicable source deductions are to then be remitted on a timely basis (beware a change in this timing should the bonus be significant).
Tax liabilities – Final corporate tax liabilities need to be paid within two months after year-end and within three months for certain eligible CCPCs.
Shareholder loans – Ensure that you repay shareholder loans from your corporation no later than one tax year after the end of the tax year in which the amount was borrowed.
Income to family members – Consider paying salaries to family members who work in the business. Keep in mind the salaries must be reasonable or the amounts may be challenged by the CRA. Salary payments as opposed to dividends also allow the recipient to have earned income for child care expenses, CPP and RRSP purposes.
- Consider purchasing equipment prior to the end of your fiscal year in order to accelerate access to capital cost allowance (CCA). Be aware of the available for use rules.
- A special election can be used to treat leased fixed assets as purchases under a financing arrangement.
Business income reserve – When proceeds from the sale of goods or real property – classified as inventory – are not due until after the year-end, a reserve on sale profits may be claimed, over a maximum of three years.
Capital gains reserve – A capital gains reserve may be claimed on the sale of capital properties, over a maximum of five years, if the proceeds of disposition are not due until after the year-end.
Taxable capital – Monitor the corporation's taxable capital for federal tax purposes. If in excess of certain limits, the corporation will begin to lose access to the small business deduction and the 35 per cent refundable ITC for SR&ED expenditures. Consider the following:
- Use excess cash to pay off some debts
- Declare dividends
- Defer planned dispositions that will result in income until after year-end
- Maximize federal and provincial refundable and non-refundable tax credits
- Trigger capital losses to recover capital gains tax paid in previous years
Personal services business – The federal tax rate applicable to income from a personal services business is 28 per cent, since the general reduction does not apply. Therefore, consideration should be given to whether it is still beneficial to carry on business through this type of vehicle.
Reporting of Internet Business Activities – In December 2013, CRA introduced Schedule 88: Internet Business Activities. A corporation that earned income from a website or a web page is required to file this schedule as part of its T2 corporate tax return for the 2015 and later tax years.
Administrative relief for small businesses – The CRA has instituted a new administrative policy that applies to certain information returns to ensure that late-filing penalties are charged in a manner that is both fair and reasonable for small businesses. This applies to NR4, T4, T4A, T4E, T5 and T5018 slips.
GST/HST and QST
Management/intercompany fees – Ensure that GST/HST or QST is charged on intercompany management fees within the corporate group. A corporation may be exempt from the said rule if a special election is made.
Place of supply rules – If sales of taxable supplies are made to different Canadian jurisdictions, be aware of the provincial place of supply rules and ensure the correct rate of tax has been applied to the transactions.
Input tax credit documentation – Ensure proper written documentation has been obtained to support the input tax credit claims. Information about the GST/HST or QST registration number of the suppliers can be found on the CRA website or Revenue Quebec's website.
Taxable benefits – GST/HST or QST needs to be assessed on amounts reported as employees' taxable benefits.
Provincial or territorial tax incentives
- M&P investment tax credits are available in Manitoba, Nova Scotia, Prince Edward Island, Quebec and Saskatchewan.
- SR&ED tax credits are available in all provinces (except Prince Edward Island) and the Yukon.
- Media tax incentives: film incentives have been enhanced in British Columbia and Nunavut; film and digital media incentives have been extended in Nova Scotia; in Saskatchewan, a new grant program replaces the former tax credit program; and film, digital media and multimedia credit rates have been reduced by 20 per cent in Quebec.
- The Manitoba co-op education and apprenticeship tax credit has been extended indefinitely.
- Quebec has an additional deduction for manufacturing small- and medium-sized enterprises (SMEs) located in remote areas: this new deduction from income of up to six per cent of gross income has been added, depending on the location of the SME and the level of its manufacturing activities, among other things.
- Quebec health services fund (HSF) reductions: for SMEs with payrolls of $5 million or less that hire specialized employees from the natural and applied sciences sector, HSF contributions are reduced or eliminated for 2015.
Corporate tax changes – subsection 55(2)
- Subsection 55(2) is an anti-avoidance rule intended to prevent the inappropriate reduction of a capital gain by way of the payment of a deductible intercorporate dividend.
- Currently, subsection 55(2) generally applies where one of the purposes of the dividend was to effect a significant reduction in the portion of a capital gain that, but for the dividend, would have been realized on a disposition of any share, unless certain exceptions apply.
- If subsection 55(2) applies, the dividend is treated as proceeds of disposition of the share or a gain from the disposition of capital property (depending on whether the share has been disposed of).
- Budget 2015 proposed to amend subsection 55(2) such that the
anti-avoidance rule applies where one of
the purposes of the dividend is to:
- Significantly reduce the fair market value of any share; or
- Significantly increase the total cost of properties of the dividend recipient (regardless of whether the dividend reduces a capital gain)
- The amendments are proposed to apply to dividends received by a corporation on or after April 21, 2015.
- The exceptions to this proposed application would be:
- Certain dividends deemed received as a result of the redemption, acquisition or cancellation of shares; and
- The safe income exception. Any dividend paid out of safe income on hand will not be caught under the 55(2) regime. Safe income is conceptually the after-tax retained earnings attributable to a participating shareholder.
- With these changes in the act, there is a great deal of uncertainty in the tax community as to whether or not this recharacterization could apply to ordinary dividends between operating companies and holding companies and certain standard creditor-proofing plans.
- Each intercorporate dividend will need to be analyzed on a case-by-case basis, and care needs to be taken when any intercorporate dividends are paid.
Personal Tax Matters
I am an employee, so what do I need to know?
Employment-related courses – Consider having your employer pay directly for job-related educational courses.
Gifts and awards – Subject to certain exceptions, non-cash gifts and non-cash awards with a total value of $500 or less annually may not be taxable to you personally. Ask your employer to consider this option.
Employee loans – Pay 2015 interest on or before January 30, 2016 to reduce your taxable benefit on employee loans.
Home office – Ensure you claim your entitlement to home office expenses if your employer will complete form T2200.
Public transit pass tax credit – Ensure you claim the cost of public transit, subject to certain criteria. Retain passes or receipts to support claims.
Employee stock options – public companies
- If you dispose of stock options for cash, discuss with your employer as to whether they can elect to forgo the tax deduction so you may claim it.
- The employee election to defer the payment of tax on stock option benefits until the shares are sold is no longer allowed.
- Employers are now required to withhold and remit income tax relating to the taxable benefit realized when public company options are exercised.
- For employees who elected, prior to March 4, 2010, to defer stock option benefits and who subsequently experienced a significant decrease in the value of their shareholding, temporary relief is available. This allows the employees to elect to pay a special tax on the option benefits equal to the proceeds they received on the sale of the shares. Please note that for Quebec residents, the special tax equals two-thirds of the proceeds received on the disposition. To qualify, the exercised shares need to be disposed of prior to December 31, 2015 and an election shall be made on Form RC310 (Form TP-1129 for Quebec residents) prior to the tax return-filing deadline for the year in which shares were disposed.
- Note that part of the new Liberal government's campaign platform proposed to change the amount that can be claimed under stock option deductions. Please see the proposed Liberal changes below.
Overseas employment tax credit – Please be aware that if you currently claim this credit it will be fully eliminated by 2016 (partial access may still be available for 2015).
Corporate vehicle – Reduce your operating cost benefit and/or standby charge benefit if you have access to a company vehicle.
To reduce the operating cost benefit:
- Consider reimbursing your employer for some or all of the personal use portion of the actual operating costs by February 14, 2016; and
- Reduce your personal driving to less than 50 per cent of the total driving, if possible
To reduce or eliminate your standby charge benefit:
- Limit your access to the vehicle (i.e. not every day); and
- Avoid personal driving
Pooled registered pension plan (PRPP) – Consider joining a PRPP if you do not have access to an employer-sponsored pension plan. PRPPs are a voluntary savings plan similar to a defined contribution RPP or RRSP.
RRSPs, RPPs and DPSPs – If you contributed less than the maximum allowable amount to your RRSP in a previous year, use the unused contribution room in addition to your normal contribution room for the 2015 tax year. If you decide not to contribute your entitlement for 2015, your ability to do so carries forward indefinitely. However, even if you do not need the deduction in 2015, you should still make the contribution if you have excess funds, so the funds can start to grow on a tax-deferred basis. You can claim the deduction in any future year.
Registered plans – contribution limits
I have investments, so what do I need to know?
Tax-Free Savings Account (TFSA)
- The eligible contribution amount for a TFSA starting in January 1, 2015 is $10,000, up from $5,000
- Canadian residents age 18 or older may contribute to a TFSA. Contributions are not deductible but withdrawals and income earned are not taxed.
- Withdrawals should be done before year-end as amounts withdrawn are not added to your contribution room until the beginning of the following year after the withdrawal.
- Consider holding eligible investments that are subject to higher tax rates (i.e. interest and foreign dividends).
Donations of private corporation shares
- Donations to registered charities are treated as a deduction for corporations and a tax credit for individuals.
- Donations of public company shares are also exempt from capital gains tax.
- For donations after 2016 consisting of shares of private
corporations and real estate, there is an exemption on the capital
gains tax which is available where:
- Cash proceeds from the disposition of the private corporation shares or real estate are donated to a qualified donee within 30 days after the disposition; and
- The shares or real estate are sold to a third party dealing at arm's length with the donor and the donee.
Gifts to foreign charities
- Foreign charitable foundations can be registered as qualified
- They receive a gift from the government
- They are involved in activities of disaster relief or urgent humanitarian aid
- They carry on activities in the national interest of Canada
Investment holding company – Ontario residents with incomes exceeding $220,000 in 2015 who earn investment income from portfolio investments will be subject to Ontario's high-earner income tax. Consider holding these investments in a corporation to benefit from the lower corporate tax rate on investment income.
Interest deductibility – If you are incurring non-deductible interest and have cash or investments on hand, consider paying down non-deductible debt and then borrowing to replace those investments. However, be mindful of triggering gains if you liquidate investments.
Capital gains and losses – If you have capital gains this year or in 2014, 2013 or 2012, consider selling an asset with an accrued loss, which can then be offset first against capital gains from 2015 and then any excess against those prior years' gains to recover tax. Before triggering losses, consider the superficial loss rules. If you have little or no other income, or have capital losses to use up, consider triggering capital gains before year-end by selling an investment that has appreciated in value, then reinvesting the proceeds, even in the same investment.
If certain conditions are met, you can dispose shares of an eligible small business corporation and defer the recognition of capital gains by reinvesting the proceeds from the sale of those shares in another eligible small business corporation by April 30, 2016.
Superficial loss rules – The superficial loss rules prevent a taxpayer from claiming a capital loss on an asset the taxpayer clearly intended to continue to hold. If you are holding an asset with an accrued loss and wish to sell the asset to offset against any capital gains realized and you purchase the identical asset within 30 days – either before or after selling the original asset – the superficial loss rules will apply to deny the capital loss, provided that the asset is held at the end of 30 days after the sale. The superficial loss would also apply if your spouse or a company controlled by you or your spouse buys the asset within the same timeframe.
- Eligible dividends may trigger AMT; and
- Eligible dividends could be tax-free if paid to individuals in lower tax brackets or who have significant non-refundable tax credits, such as tuition and education amounts.
First-time donor's super credit – A first-time donor is entitled to claim an additional 25 per cent credit on up to $1,000 of donations made after March 20, 2013. The credit can be claimed only once, after 2012 and before 2018.
What do families need to know?
Estate planning – Ensure your estate plan is meeting your current and future objectives. Also ensure that your will is up to date.
Income-splitting – Consider an income-splitting plan to lend funds to family members in lower tax brackets. The current prescribed rate is one per cent. Interest on intra-family loans must be paid on or before January 30, 2016, to avoid attribution of income.
Split income with minor – Commencing for 2015 taxation years, the income attribution rules apply to "split income" that is paid or allocated to a minor from a trust or partnership, if:
- The income is derived from a business or a rental property; and
- A person related to the minor is actively engaged on a regular basis in the activities of the trust or partnership to earn income from any business or rental property, or has a direct or indirect interest in the partnership.
Registered Education Savings Plan (RESP)
- Plan your contributions to ensure the RESP will receive the maximum lifetime Canada Education Savings Grant (CESG) of $7,200.
- Asset transfers between RESPs for siblings are now allowed, subject to certain criteria.
Registered Disability Savings Plan (RDSP) – If you have a child who qualifies for the Disability Tax Credit and RDSP, you should:
- Set up an RDSP to qualify for the Canada disability savings bond (maximum of $20,000 per child)
- Contribute to an RDSP to qualify for the Canada disability savings grant (maximum of $70,000 per child)
Child care expenses – Available deductions for child care expenses will increase by $1,000 for children under seven or children eligible for the Disability Tax Credit. Boarding school and camp fees qualify for the child care deduction, though limits may apply. Ensure that child care expenses for 2015 are paid by December 31, 2015 and a receipt is obtained.
Children's Fitness Tax Credit – Up to $1,000 of fees eligible for the Children's Fitness Tax Credit can be claimed on the parent's personal tax return. Effective for the 2015 tax year, the tax credits will become refundable to the taxpayer.
Education and textbook tax credits – Claim these credits if you attend post-secondary school either full time or part time. Eligible fees for exams taken after 2010 may qualify for the tuition tax credit.
Unused and unclaimed tax credits – Consider transferring your education, tuition or textbook tax credits to your spouse, parent or grandparent, subject to limitations, if you are unable to utilize them. The carryforward period is generally indefinite for unclaimed education, tuition and textbook credits and five years for unclaimed student loan interest.
Moving expenses – Your moving expenses may be deductible if you moved to attend school or moved from school to work or back home.
Lifetime Learning Plan (LLP) – You are allowed to make a tax-free withdrawal from your RRSP to finance full-time education – or part-time for students who meet one of the disability conditions – for yourself, your spouse or your common-law partner. You may withdraw up to $10,000 in a calendar year and up to $20,000 in total.
Adoption tax credit – Beginning with the 2015 taxation year, the 2015 federal budget increased the maximum amount of the adoption tax credit to $15,255 from the previous maximum amount of $15,000. This maximum amount will be indexed annually for inflation.
The Golden Years
Inter vivos trust – If you are 64 or older and live in a province with a high probate fee, consider establishing an inter vivos trust as part of your estate plan.
Testamentary trust – Starting in 2016, the graduated tax rate applicable to a testamentary trust created by an individual's death will be replaced with a flat top marginal rate, if the testamentary trust has been in existence for more than 36 months. The graduated tax rate will continue to apply for testamentary trusts created less than 36 months ago and trusts with beneficiaries who qualify for the Disability Tax Credit.
- Previously a testamentary trust computed its income tax liability using the graduated personal income tax rates. Multiple testamentary trusts could be established in a will to magnify this benefit.
- Only a "graduated rate estate" (a newly defined term)
will now be entitled to use the graduated rates and includes:
- An estate that is a testamentary trust but only for the first 36 months after the death of the testator. Consequently, an ongoing estate, or testamentary trusts created pursuant to the will such as a spousal trust, would only benefit from the graduated tax rates for its first 36 months; or
- A testamentary trust for the benefit of a disabled individual who would be eligible for the federal Disability Tax Credit.
- All other trusts, whether inter vivos or testamentary, are subject to a flat rate equal to the top personal income tax rate (29 per cent federally plus the applicable provincial taxes).
- If a trust is not a graduated rate estate, it will be subject
to the following provisions, which previously did not apply to
testamentary trusts. More specifically, a testamentary trust (like
an inter vivos trust):
- Will be required to make quarterly instalments and pay its balance due on March 31 of the following year;
- Must adopt a calendar year-end. If a testamentary trust has a non-calendar year-end, it must change its year-end to December 31 in the year in which it ceases to be a graduated rate estate. For example, a testamentary trust created on September 30, 2014 could choose a September year-end. The trust would be a graduated rate estate until September 30, 2017 and would file its September 30, 2017 return using the graduated rates. Thereafter, it must adopt a December 31 year-end and would file a stub period return for the period ending December 31, 2017.
- Will not be entitled to the $40,000 AMT exemption.
- May not make ITCs available to its beneficiaries.
- Will not be able to apply for a refund after the normal reassessment period of three years, rather than the 10-year period available for individuals and graduated rate estates pursuant to the Taxpayer Relief rules.
- May only file a Notice of Objection within 90 days of the Notice of Assessment, rather than one year after its filing date of 90 days after the end of the year.
- These rules will apply after December 31, 2015. This will require all existing estates/testamentary trusts that currently file on the basis of an off-calendar year-end to be deemed to have a year-end of December 31, 2015 and to file on the basis of a calendar year thereafter.
- Also, with this deferred implementation date, the presumption is that estates/testamentary trusts created prior to the 2015 budget announcement will have time to reorganize their affairs in consideration of the new provisions. There is no grandfathering for estates/testamentary trusts established prior to the 2015 budget announcement.
If you turned 71 in 2015, you must collapse your RRSP. You may:
- Defer taxes on all or a portion of the amount in your RRSP by transferring the funds to a registered retirement income fund (RRIF);
- Contribute to your RRSP only until December 31, 2015 if you have unused RRSP contribution room or earned income in the previous year;
- Contribute to your spouse's RRSP until the end of the year that your spouse reaches age 71 if you have unused RRSP contribution room or earned income in the previous year; and
- Make an additional 2015 contribution (facts depending) by the end of December 31, 2015, subject to a small penalty.
Pension income – If you receive pension income, consider splitting it with your spouse or common-law partner, to a maximum of 50 per cent. To maximize your pension credit, you will require at least $2,000 of pension income if you are age 65 or older.
Old Age Security (OAS) – Allocation of pension income from a spouse or receipt of dividends may trigger the OAS clawback. Consider measures to invest so as to earn capital gains, as only 50 per cent of the gain is included in income for the purposes of calculating the OAS amount. Alternatively, explore additional options to manage your income (e.g. through a corporation) in order to avoid the OAS clawback.
Canada Pension Plan (CPP) – If you are 60 to 70 years of age and employed or self-employed, you must contribute to the CPP. However, if you are between the ages of 65 and 70, you can elect to stop these contributions. This election can be revoked the following year. Be aware that CPP benefits are reduced if you begin collecting prior to turning 65.
Individual pension plans – If you are over 71, you must make minimum withdrawals if you have a defined benefit RPP that was created primarily for you.
Ontario Retirement Pension Plan (ORPP) – Starting in 2017, employees and employers will be able to register for the ORPP. The ORPP is intended to provide a predictable source of retirement income for the lives of Ontarians.
Take the following example to better illustrate how the ORPP aims to replace 60 per cent of an individual's income who has contributed to the CPP and ORPP for 40 years and retires at 65.
How is this beneficial? Before under the federal income tax, self-employed individuals were not able to participate in registered pension plans; however, the Ontario government is exploring options to enable the participation of self-employed individuals in the ORPP.
The enrolment schedule shown below indicates when employers will be able to register for ORPP:
Large employers (500 or more employees) without registered workplace pension plans. Contributions to start: January 1, 2017
Medium employers (50-499 employees) without registered workplace pension plans. Contributions to start: January 1, 2018
Small employers (49 or fewer employees) without workplace pension plans. Contributions to start: January 1, 2019
Employers with a workplace pension plan that is not modified or adjusted to meet the comparability test, as well as employees who are not members of their workplace's comparable plan. Contributions to start: January 1, 2020
United States Matters
- In March 2010, the U.S. enacted the Foreign Account Tax Compliance Act (FATCA). FATCA would require non-U.S. financial institutions to report to the U.S. Internal Revenue Service (IRS) accounts held by U.S. taxpayers. Failure to comply with FATCA could subject a financial institution or its account holders to certain sanctions, including special U.S. withholding taxes on payments to them from the U.S.
- FATCA has raised a number of concerns in Canada – among both dual Canada-U.S. citizens and Canadian financial institutions. One key concern was that the reporting obligations in respect of accounts in Canada would compel Canadian financial institutions to report information on account holders who are U.S. residents and U.S. citizens (including U.S. citizens who are residents or citizens of Canada) directly to the IRS, thus potentially violating Canadian privacy laws.
- Under the agreement, financial institutions in Canada will not report any information directly to the IRS. Rather, relevant information on accounts held by U.S. residents and U.S. citizens (including U.S. citizens who are residents or citizens of Canada) will be reported to the Canada Revenue Agency (CRA). The CRA will then exchange the information with the IRS through the existing provisions and safeguards of the Canada-U.S. Tax Convention. This is consistent with Canada's privacy laws.
- The IRS will provide the CRA with enhanced and increased information on certain accounts of Canadian residents held at U.S. financial institutions.
- The first required exchange of information will take place in 2015. There are reporting exceptions for small Canadian financial institutions with assets less than $175 million, accounts less than $50,000 in value, registered plans, and situations in which the account holder has a Global Intermediary Identification Number.
- Non-compliance with these rules may result in additional withholding taxes, potential entry problems to the United States, mandatory filing of additional returns with the IRS and possible imposition of U.S. income tax, resulting in a potential for double taxation.
- Continues to be a highly sensitive area.
U.S. estate tax – Canadians may be exposed to U.S. estate tax if they hold U.S. property (e.g., shares in U.S. corporations, even if held in a Canadian brokerage account; U.S. real estate, including vacation homes; interests in U.S. partnerships, etc.).
U.S. federal income tax return/treaty-based tax return – Determine whether you are conducting activities in the United States that require you to file a U.S. federal income tax return, or U.S. treaty-based tax information disclosure return.
State and municipal taxes – The rules at the state and local level differ in many cases from the U.S. federal level. If you are carrying on business in the U.S., please consult your tax advisor to ensure that you are onside, as each jurisdiction has its own set of rules.
U.S. retirement plans – If you are a Canadian resident, consider transferring your U.S. 401(k) or IRA plan on a tax-deferred basis to an RRSP.
U.S. tax reforms
- Limit the ability of a U.S taxpayer to claim foreign tax credits in certain situations;
- Impose penalties on U.S investors that fail to report their investments in foreign financial assets, PFICs and other foreign entities; and
- The Foreign Account Tax Compliance Act (FATCA) initiative embarked upon in mid-2015 essentially forces Canadian financial institutions to provide information on U.S. account holders to the IRS.
Canadian RRSPs, RRIFs, RPP and DPSPs – A recent U.S. IRS announcement allows U.S. citizens and resident aliens who hold interests in Canadian RRSPs or RRIFs and meet certain conditions, to automatically qualify for a tax deferral. However, certain U.S. tax return forms may still be required.
Canadian TFSAs – Investment income earned in a TFSA may be taxable for U.S. tax purposes in the year it is earned. Additional reporting information may have to be filed with the IRS annually.
Canadian mutual funds – An annual information return needs to be filed with the IRS in respect of a U.S. citizen, green card holder or U.S. resident alien who owns Canadian mutual funds in 2015.
Loans from foreign subsidiaries – Be aware that 2013 legislation introduced additional tax complexities associated with loans from foreign affiliates to Canadian corporate shareholders and to certain non-arm's length persons.
Transfer pricing – If your corporation has transactions with a related non-resident corporation or partnership, ensure that the transfer pricing documentation meets the requirements imposed by the Canadian transfer pricing rules and those of the foreign jurisdiction. Non-compliance can result in significant penalties. Note that there are substantial changes in the winds here with recent pronouncements from the OECD.
Thin capitalization – The thin capitalization rules prevent non-resident shareholders who own the shares of a Canadian corporation that give the holder 25 per cent or more of the votes or having a fair market value of 25 per cent of the total (i.e. "specified" non-resident shareholder) from financing the corporation with high levels of debt. Currently, the thin capitalization rules limit the interest expense deduction of a Canadian corporation where the amount of the debt owing to certain non-residents exceeds a 1.5 to 1 debt-to-equity ratio. The interest expense that exceeds the debt-to-equity ratio limit is not deductible for Canadian income tax purposes.
It used to be possible for a taxpayer to avoid these rules through the use of a ''back-to-back loan'' arrangement which involves interposing a third party (such as a foreign bank) between two related taxpayers (for instance, a foreign parent corporation and its Canadian subsidiary) in an attempt to avoid the application of the thin-cap rules. However, the 2014 federal budget added an anti-avoidance provision to subject certain back-to-back loans to the thin capitalization rules. On these lending arrangements, the taxpayer will be deemed to owe an amount to the specified non-resident (and not to the intermediary) in respect of the obligation. In addition, the taxpayer will also be deemed to have an amount of interest paid or payable to the specified non-resident that is equal to the proportion of the interest paid or payable by the taxpayer on the obligation owing to the intermediary. In addition to the thin capitalization rules, Part XIII withholding tax will apply in respect of a back-to-back loan arrangement to the extent, and as if, the financial intermediary did not exist. These measures apply to taxation years that begin in 2015.
Loan receivable due from a non-resident corporation – Where a non-resident controlled Canadian corporation makes loans to its foreign parent or related non-resident companies, the Canadian corporation could be subject to shareholder benefits and deemed dividend withholding tax in certain circumstances. Newly enacted legislation permits the Canadian corporation to elect out of the deemed dividend withholding tax rules, if the Canadian corporation includes interest on the loan at a prescribed rate in income. The legislation applies to loans received or indebtedness incurred after March 28, 2012. Loans made by, or to, certain partnerships may also be eligible for the election.
Payments to non-residents
- You may be required to withhold and remit 15 per cent of certain payments made to non-residents in respect of fees, commissions or other services rendered in Canada.
- Be aware of the NR301, NR302 and NR303 forms that non-residents should file in support of reducing withholding tax rates on payments under a tax treaty.
- Be aware of Form R102-R that requests reduced withholdings on payments made to non-resident employees.
Regulation 102 – withholding tax credit
- Administrative burden on non-resident employers who send employees to work in Canada
- Required to withhold and remit to CRA taxes under Reg 102 for Canadian-source income
- Under our treaties, most of these workers would not have had to pay tax in Canada (when number of days or Canadian-source income is low)
- The 2015 budget introduced an exception to the requirement to
withhold, if the following criteria are met:
- Employee must meet the exemption criteria under a tax treaty
- Employee must not be in Canada 90 days or more in any 12-month period
- Employer must be resident in a treaty jurisdiction
- Employer must not carry on business in Canada through a PE
- Employer must be certified by the CRA
Election tax update – new Liberal government
With the Liberal government coming into power in November 2015, there are some key campaign promises, which if they come to fruition, will be very impactful from an income tax standpoint. While it may take time for some of these to come to fruition in the form of amendments to the tax legislation, the following are some of the salient changes we can expect as the Liberals look to balance the budget by 2019.
- Increase the individual federal marginal tax rate on Canada's "top one per cent"
- Cancellation of child benefit cheques for individuals with income exceeding $1 million, in order to increase the benefit for middle class individuals
- Capping of the amount of stock option deductions at $100,000 of gains
The new government has proposed a top marginal tax bracket of 33 per cent for individuals earning more than $200,000/year. The chart below summarized the potential new rates for salaried employees in each province if the changes go through:
In addition, in an effort to decrease the deficit, the Liberal government might set its sights on eliminating income-splitting. Entrepreneurs in Canada have reduced their overall tax liability by transferring their income to lower-income family members, such as a spouse, to reduce the household's overall tax burden. One proposed method would be the elimination of the Family Tax Cut, introduced in 2014 by the previous government to provide income-splitting relief of up to $2,000. The new government would counter this by increasing the amount of the child tax benefit and introducing tax breaks for middle class families.
Key Tax Dates
December 15, 2015
- Final quarterly instalment of 2015 tax due for individuals
December 24, 2015
- This is likely the final trading day for Canadian exchanges for those wishing to have trades settled for 2015
December 31, 2015 – Last opportunity to make a payment for the following items in order to utilize any applicable credit or deduction on your 2015 return
- Charitable donations
- Payment of union dues and professional fees
- Investment counsel fees, interest and other investment expenses
- Alimony and maintenance payments
- Child care and child fitness expenses
- Medical expenses
- Moving expenses of individuals
- Political contributions
- Deductible employee legal fees
- Tuition fees and interest on student loans
- Payments to employer to reduce standby charge
- RRSP contributions if you turn 71 by December 31, 2015
January 15, 2016
- U.S. taxes: estimated tax payments due for individuals
February 1, 2016 (January 31, 2016 is a weekend day)
- Interest due on intra-family loans
- Non-deductible interest due on loans from your employer to reduce your taxable benefit
February 16, 2016
- Payment to your employer to reduce your taxable operating benefit from an employer-provided automobile
February 29, 2016
- Last day to file T4, T4A and T5 Summary and Supplementary forms
February 29, 2016
- Deductible contributions to your own RRSP or spousal RRSP (for 2015 deduction)
- RRSP Home Buyer's Plan repayment due (to avoid 2015 inclusion)
March 15, 2016
- First quarter (2015) personal tax instalment due
March 31, 2016
- Last day to file income tax returns for inter vivos trusts without penalty
- Last day to file NR4 Summary and Supplementary forms regarding amounts paid or credited to non-residents of Canada
April 15, 2016
- U.S. individual tax return due if you have not obtained an extension
May 2, 2016 (April 30, 2016 is a Saturday)
- Last day to file personal tax returns, except for self-employed individuals or spouses of self-employed individuals, in which case the deadline is June 15, 2016. No matter your deadline, interest will be charged on any balance due after April 30.
- Filing deadline for personal return may be later if individual or spouse died during the year; however, a terminal return is required.
2015 TOP MARGINAL PERSONAL INCOME TAX RATES
2015 & 2016 CORPORATE TAX RATES