Canada: Federal Tax Rate Increases For Canadians

Last Updated: December 11 2015
Article by Kenneth Keung

On December 7, 2015, Canada's new Finance Minister, Bill Morneau, tabled measures to reduce the federal individual income tax rate for the $45,282 to $90,563 tax bracket from 22% to 20.5%, and introduced a new 33% top rate bracket for taxable income over $200,000, effective Jan. 1, 2016. Additionally, the Tax-Free Savings Account (TFSA) annual contribution limit will be rolled back to $5,500 after 2015. While these amendments were not unexpected as they were part of the Liberal's election platform, the proposal also includes subtle but important consequential amendments affecting tax rates/credits for trusts and estates, "kiddie tax", charitable donations, corporate refundable taxes on investment income for Canadian-controlled private corporations (CCPCs), and Part IV tax. This short blog summarizes these changes and offers some thoughts.

Below is a short summary of the changes, all of which become effective January 1, 2016:

  1. Federal personal tax rate for taxable income between $45,282 and $90,563 will be reduced from 22% to 20.5%;
  2. The top federal personal tax rate of 29% will apply to taxable income between $140,388 to $200,000, and a new top federal personal tax rate of 33% will apply to taxable income greater than $200,000;
  3. The rate for the federal charitable donation tax credit in excess of $200 will be increased from 29% to 33%, but only to the extent the individual's taxable income exceeds $200,000;
  4. The rate of tax on "split income", which generally comprises of dividends from unlisted shares, certain business/partnership/trust income allocated to a minor from a related party and certain capital gains earned by a minor, also known as "kiddie tax", will be increased from 29% to 33%;
  5. The flat tax rate applicable to trusts and estates, other than a graduated rate estate (GRE) or a qualified disability trust (QDT), will be increased from 29% to 33%;
  6. Consequential rate changes to the taxation of investment income of private corporations, effective Jan. 1, 2016, and pro-rated for taxation years that straddle Jan. 1, 2016:

    1. The rate of refundable tax for a CCPC's investment income will be increased from 6.67% to 10.67%
    2. The addition to refundable dividend tax on hand (RDTOH) for investment income earned by a CCPC will be increased from 26.67% to 30.67%;
    3. The rate of refundable Part IV tax on portfolio dividends earned by a private corporation will be increased from 33.33% to 38.33%;
    4. The rate at which refunds are made out of a private corporation's RDTOH will be increased from 33.33% to 38.33%.
  7. The previous government enacted an increase of the TFSA contribution limit from $5,500 to $10,000 for 2015 and subsequent years. The proposed measure announced on Dec. 7 will reverse this increase after 2015, so that for 2016, an individual's TFSA annual contribution limit will be $5,500. This limit will be indexed to inflation for years subsequent to 2016.

A previous blog from our firm has already discussed the politics of the Liberal rate increases, so we will not venture into it again here. But it is nevertheless interesting to point out that, by the government's own calculation, the net impact of these changes will cost the federal government $1.27 billion in 2016 and by the end of 2021, $6.59 billion.

Given there are less than four weeks before the end of 2015, business owners across the country are thinking about year-end planning. In Alberta, the double-dose of provincial and federal tax rate increases has added particular urgency to 2015 year-end planning. Consider the following rate increases for an Albertan earning various types of income at the top marginal tax bracket (over $300,000 of taxable income):

Type of income 2015 tax rates 2016 tax rates
Ordinary income 40.25% 48.00%
Capital gains 20.13% 24.00%
Non-eligible dividends 30.84% 40.24%
Eligible dividends 21.02% 31.71%

These tax rate increases are particularly pronounced for dividends, with the increase for eligible dividends representing a whopping 50% increase (from 21.02% to 31.71%). In some circumstances, it may be worthwhile to consider accelerating dividend income into 2015 to capture the lower tax rates. However, if inter-corporate dividend planning is involved, one must consider the recently proposed amendments to subsection 55(2) which has completely changed the landscape on inter-corporate planning (see our recent blog on this topic). A keen observer will also notice that starting in 2016, the top rate on capital gains will be significantly less than the effective tax rates of both non-eligible and eligible dividends – a new phenomenon in Alberta where the effective tax rate on eligible dividends has traditionally been on-par with capital gains. This shift means that planning that converts dividend income into capital gains has suddenly become much more interesting in Alberta. This includes planning for a taxpayer's death: for post-mortem planning after 2015, on a pure tax rate basis, a "pipeline" strategy is preferable so as to obtain capital gains rates of 24% as opposed to a subsection 164(6) strategy, which will result in taxable dividend rates of 31.71% or 40.24%. Of course, considerations other than tax rates will need to be taken into account when implementing a post-mortem plan.

Practitioners should also be mindful of the "kiddie tax" rate increase and the increase for all trusts and estates (other than a GRE or a QDT) effective Jan. 1, 2016, and this 33% rate will be a flat rate regardless of income level. This timing coincides with the coming-into-force of the GRE regime, which takes away all preferential treatment previously afforded to testamentary trusts and limits them only to GREs post 2015.

These personal tax rate increases, plus the increase in Alberta corporate tax rates, also means that it is going to become more punishing for incorporated workers who are personal services businesses (PSB) under the Income Tax Act. In addition to denial of substantially all expense deductions, the total tax burden of a PSB structure in Alberta, at top marginal rates, will be an astonishing 59% in 2016 (compared to 52% in 2015) on a fully-distributed basis. As explained in our previous blog, there are many incorporated workers in the oil and gas industry in Alberta who may be caught inadvertently under these PSB rules.

A silver lining to the new 33% top tax bracket is the corresponding increase to the charitable donation tax credit for those individuals whose income are subject to this new bracket. Combined with the generous Alberta donation tax credit of 21%, starting in 2016, an Albertan at the top rate bracket will be able to recover 54 cents on every dollar donated to a registered charity in excess of $200.

Based on these proposed tax rates, the estimated total tax burden and potential deferral opportunity on various forms of income earned by a CCPC, once it is flowed all the way through to a shareholder as a dividend at the top federal and Alberta marginal rates are as follows:

General Rate Business Income Small Business Income Investment Income
2015 2016 2017 2015 2016 2017 2015 2016 2017
Combined Corporate and Personal Taxes 41.6% 50.2% 50.2% 40.5% 48.3% 48.5% 44.0% 52.2% 52.6%
Net benefit (cost) of incorporation -1.3% -2.2% -2.2% -0.3% -0.3% -0.5% -3.7% -4.2% -4.6%
Deferral (prepayment) if retained in the CCPC 15.6% 23.2% 23.2% 26.5% 34.8% 35.5% -1.7% 1.5% 2.0%

As you can see, there is close to perfect integration in Alberta for corporate income entitled to the small business deduction, because the net cost of earning the income corporately compared to earning the same personally is generally less than 0.5%. Due to the increases in personal tax rates, the deferral opportunity will become a lot more significant starting in 2016 for corporate-earned business income (34.8% deferral opportunity for corporate income entitled to the small business deduction, and 23.2% for general rate business income). Therefore, to the extent the corporation's shareholders do not require distribution and their marginal rates are already utilized, consideration should be given to retaining such corporate profits to maximize the tax deferral advantage.

Corporate-earned investment income, however, will become less attractive. In 2015, the net tax disadvantage of earning investment income in a CCPC compared to earning it personally is 3.7%. This disadvantage increases to 4.6% in 2017. However, certain planning can be done to avoid this (e.g. there are ways to convert a CCPC to a non-CCPC in order to avoid the refundable tax regime and to gain access to eligible dividends). The proposed increases to a CCPC's refundable tax on investment income and to Part IV tax have no net impact on flow-through tax rates because all such additional taxes are refundable through the RDTOH regime. The intention behind the increases to corporate refundable taxes is to match the increases in personal tax rates, in order to prevent a deferral opportunity on corporate-earned investment income. However, what is interesting is that even with these increases, starting in 2016, there is generally no longer a net tax benefit to paying out non-eligible dividend to recover RDTOH if the shareholder is already at top marginal tax rates. In 2016, the corporate tax on investment income is actually 1.5% lower than the net combined personal and corporate tax after the investment income is paid out as non-eligible dividend (assuming top personal marginal tax rates). This difference grows to 2% in 2017.

This blog is not intended to be an exhaustive list of planning considerations in light of recent tax rate increases. Accountants, lawyers, and their clients will have no choice but to consider such changes and adjust course accordingly.

Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients' special circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Kenneth Keung
Events from this Firm
27 Oct 2018, Seminar, London, UK

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad.

1 Nov 2018, Seminar, Doha, Qatar

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad. Many US residents will see an immediate benefit on their 2018 tax return, but for US expats and green card holders living abroad, things may have changed for the worse.

3 Nov 2018, Seminar, Dubai, United Arab Emirates

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad. Many US residents will see an immediate benefit on their 2018 tax return, but for US expats and green card holders living abroad, things may have changed for the worse.

Similar Articles
Relevancy Powered by MondaqAI
TaxChambers LLP
Burnet, Duckworth & Palmer LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
TaxChambers LLP
Burnet, Duckworth & Palmer LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions