What is this all about..
Tax changes announced in the last few weeks, both by Alberta and more recently the Federal government will impact us all – particularly in 2016 and subsequent years.
In particular, the Federal changes were introduced without the usual fanfare that surrounds a “budget”. The changes are nevertheless very extensive, and certainly worthy of at least a “mini-budget”.
Tax Increases.. at this time of the year?
Isn’t the depressed oil price and sliding loonie enough? Do I have to pay more taxes as well?
Unfortunately yes – there are significant tax increases, especially for Alberta residents.
…by the way, the sliding loonie actually reduces the impact of dropping oil prices!!
So, what has changed
Drawing from the iPhone 6s banner – “The only thing that’s changed is everything”
Okay…not everything, but checkout some of the highlights:
Highlights – Federal
- 5% tax rate (reduced from 22.0%) for taxable income between $45,282 and $90,563 – potential maximum saving of $680 – the middle class tax cut
- New 33% tax rate on taxable income over $200,000 – to pay for the middle class tax cut!
- TFSA contribution limit reduced to $5,500, effective for 2016. Limit for 2015 remains at $10,000. Carry-forward of limit available.
- Tax credit for Charitable Donations (in excess of $200) increases from 29% to 33% – but only to the extent that taxable income exceeds $200,000;
- Income splitting for families with children, which had been worth up to $2,000 a year in tax savings, is removed
- A number of corporate tax changes for private corporations (CCPCs) impacting the taxation of investment income – increases in rates of Refundable tax, Dividend refund and Part IV tax on dividend income
- Flat tax rate applicable to trusts and estates (other than certain types) is increased from 29% to 33%
- Current Child Benefit programs (UCCB, CCTB and NCBS) will be replaced with a new Canada Child Benefit program, tied to household incomes
Highlights – Alberta
- Personal income tax rates move from the single flat rate of 10% to progressive rates of 10% – 11.25% in 2015 and 10% – 15% in 2016
- Progressive rates only apply to income over $125,000 a year
- General corporate tax rate increases from 10% to 12%, effective July 1 2015
What does all this mean…
The best way to check the impact of the tax increases is to examine the table below – the rates are Federal and Alberta combined.
Remember:
- type of income is critical, as each type is taxed at different rates
- tax rates are also dependent on income levels
- the “range” of rates indicates the progressive tax rates as income increases
- “top” rate in each case, applies to taxable income over $300,000 (yes..$300,000)
- Dividends from private corporations are predominantly the “Non-eligible” type
| Type of income | 2015 tax rates range | 2016 tax rates range |
|---|---|---|
| Ordinary Income | 25.00% to 40.25% | 25.00% to 48.00% |
| Capital Gains | 12.50% to 20.13% | 12.50% to 24.00% |
| Non-eligible Dividends | 12.84% to 30.84% | 13.33% to 40.24% |
| Eligible Dividends | -0.03% to 21.02% | -0.03% to 31.71% |
Of Note:
- Tax rates for investment income have increased dramatically, as top tax rates for dividends increase by nearly 10 percentage points (almost 50% increase)
- Top capital gains rate is significantly lower than the eligible dividends rate – this may influence investing decisions, on whether to invest for income or potential capital gains
What should I do
- Each situation has to be evaluated separately – there is no “one size fits all”
- Determine your 2015 income by type, and estimate 2016 income, by type
- Determine your cash requirements in the next year – if you require significant additional amounts from your corporation, planning the timing of the cash draws will minimize the tax thereon
- The $200,000 taxable income threshold is important for 2016
- If you are above the threshold, income, dividends and capital gains should be taken in 2015
- RRSP deductions (not contributions) however are more valuable in 2016
- If you are below the threshold, the reverse will also be true – due to the lower middle tax bracket
- Overall impact may or may not be significant
- You may find that little or no action is required – e.g. corporate deferral of income becomes more valuable, with higher tax rates!
Let’s discuss your situation …
..this a just a Note to highlight the salient points
Any More? ..Where is the detail?
A number of other proposals are not addressed here.
If you want additional detail, tables, what-ifs etc., let me know – it can tide you over the holiday season!
