On December 7, 2015, the new Liberal government presented legislation in the House of Commons that will enact a number of tax changes based on their federal election platform. With their majority, they will be able to quickly pass this legislation and the changes will take effect on January 1, 2016.
As promised, the government has reduced the rate of tax on what was the middle tax bracket. The tax rate will be reduced from 22% to 20.5%. This will mean a savings of 1.5% on an individual's income between $45,282 and $90,563. The government also introduced a new fourth tax bracket to fulfil its promise to increase the tax on the top 1% of income earners. Individuals will pay federal tax of 33% on income in excess of $200,000. In Ontario this will result in a top marginal tax rate of 53.53%.
With the introduction of the new top tax bracket, the government is making a number of consequential changes that will also impact individuals. They include:
- An increased federal donation tax credit for individuals with earnings subject to the new 33% tax rate;
- An increased federal tax on split income (the "kiddie tax") from 29% to 33%; and
- An increase in the federal tax rate on inter vivos trusts to the new 33% rate.
Another election promise was the rollback of the Tax Free
Savings Account (TSFA). For 2016 and subsequent years the TSFA
limits will revert back to the original rules. This means that the
2016 contribution limit will be $5,500 and future year's limits
will be indexed to inflation and rounded to the nearest $500. The
$10,000 limit for 2015 remains, so for those that did make use of
the extra room there is no need to make a withdrawal. For those
that did not make the additional contribution not all is lost as
your carry-forward room will reflect this one year spike.
There were a number of corporate tax changes that are related to the new personal tax bracket. Changes include:
- An increase in the surtax on investment income earned by Canadian Controlled Private Corporations (CCPC) from the current 6 2/3% to 10 2/3%;
- Changes to the calculation of refundable dividend tax on hand to take into account the new surtax rate;
- Increase the dividend refund rate from the current 33 1/3% to 38 2/3% on dividends after 2016 paid by private corporations, limited to the corporation's refundable dividend tax on hand account; and
- Increase in the part IV tax rate on dividend income from the current 33 1/3% to 38 1/3%.
The government did not introduce changes to the Child Benefit or a repeal of the income splitting for families with children. They did announce that these changes will be introduced in their first budget. The Department of Finance release made clear that pension income splitting would not be repealed.
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