One of the first orders of business of the newly elected Liberal government was to alter the tax rates for Canadians. Released on Dec. 9, 2015, Bill C-2 (an act to amend the Income Tax Act) resulted in proposed amendments to the personal and corporate tax rates, effective Jan. 1, 2016. (See our Tax Flash of Dec. 10, 2015 for specific details of the tax rate changes.)
The bill resulted in a 1.5 per cent reduction in the tax rate on income between $45,283 and $90,563 (the middle tax bracket), and the introduction of a new tax rate of 33 per cent for income in excess of $200,000. Table 1, below, shows the top marginal tax rate for each province, effective Jan. 1, 2016.
Bill C-2 also affects the taxation of investment income by Canadian-controlled private corporations (CCPCs). The purpose of the changes was to eliminate any incremental tax-deferral advantage for individuals earning investment income through a corporation that would otherwise have resulted from the increase in the top marginal personal tax rate.
- Dividend refund rate paid out of a private corporation An increase from 33.33 per cent to 38.33 per cent, pro-rated for taxation years straddling Jan. 1, 2016
- Refundable Part IV tax rate An increase from 33.33 per cent to 38.33 per cent for dividends received after 2015
- Refundable tax on CCPC's investment income An increase from 6.67 per cent to 10.67 per cent, pro-rated for taxation years straddling Jan. 1, 2016
Table 2 shows the top corporate tax rate on investment income for each province, effective Jan. 1, 2016.
As a result of the corporate and personal tax rate changes, the integrated tax rate has also changed. The integrated tax rate takes into account both the corporate and personal levels of taxation for individuals who earn their income indirectly through a corporation. Table 3 shows the top integrated tax rate for each province, effective Jan. 1, 2016.
As of the date of this Tax Alert, New Brunswick was the only province or territory across Canada to announce its 2016-2017 provincial budget. Prior to the release of the budget by New Brunswick Finance Minister Roger Melanson, the province was facing a combined federal and provincial tax rate increase of almost 12 per cent over the 2014 rate for high income earners. It is interesting to note that the N.B. government decided to reduce its highest marginal personal tax rate by 5.45 per cent effective January 1, 2016 and increase the general corporate tax rate by two per cent effective April 1, 2016. Also included in the provincial budget was the increase in the Harmonized Sales Tax by two per cent, bringing N.B.'s HST rate to 15 per cent effective July 1, 2016.
It will be interesting to see how other provinces respond to the increase in federal tax rates introduced by the Federal Government as the provincial budgets continue to roll out. These current changes to the personal and corporate tax rates warrant a detailed review of current tax planning strategies to determine if changes to these strategies are necessary.
Contact your Collins Barrow advisor to discuss the impact these federal and future provincial tax changes could have on you.
Table 1 – 2016 top marginal personal tax rates by provincei
|Province||Ordinary income||Capital gaines||Eligible dividends||Non-eligible dividends|
|Prince Edward Island||51.37%||25.69%||35.67%||44.22%|
|Newfoundland and Labrador||48.30%||24.15%||38.47%||39.40%|
Table 2 – 2016 corporate investment income tax rate for CCPCs by province
|Prince Edward Island||54.67%||50.67%|
|Newfoundland and Labrador||52.67%||48.67%|
Table 3 – 2016 Integrated corporate and personal tax rates by province
|Province||Small business rate income||General rate business income||Investment incomevi|
|Prince Edward Island||52.59%||55.61%||57.61%|
|Newfoundland and Labrador||47.58%||56.31%||52.73%|
i. These rates apply to income in excess of $200,000, unless otherwise indicated.
ii. On income in excess of $220,000.
iii. Reflects personal tax rate changes introduced in the 2016-17 provincial budget announced on February 2, 2016. The effective date of this rate is January 1, 2016.
iv. On income in excess of $500,000.
v. Reflects corporate tax rate changes introduced in the 2016-17 provincial budget announced on February 2, 2016. The effective date of this rate is April 1, 2016. Prior to this date the rate is 52.67%.
vi. Assumes sufficient funds available to recover 100 per cent of the refundable tax.
vii. Reflects personal and corporate tax rate changes introduced in the 2016-17 provincial budget announced on February 2, 2016.
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