Justin Trudeau’s Liberals wasted little time delivering on the change promised in their election platform, but not every entrepreneur will be pleased that the Grits are keeping their proposed tax-amendment promises.
The instant the calendar rolled over to 2016, a series of new federal tax changes took effect, including a provision to raise taxes on the top 1% of income-earners. The new tax on high-income earners was just one of several changes introduced by the new Finance Minister Bill Morneau in December. The Liberal tax policy shifts could have a significant impact on corporate and personal tax planning strategies for SME owners across the country.
Here are five highlights of the most significant changes made so far:
• The Liberals lowered the personal tax rate to 20.5% from 22% on income ranging from $45,283 to 90,563. In the meantime, a new tax bracket was introduced on income of $200,000 or more. Under this change, the personal tax rates on income over $200,000 will jump to 33% from 29%. Depending on the province, Canada’s combined marginal tax rate will now range from 44.5% (Nunavut) to a whopping 58.75% (New Brunswick), with a top combined rate for Ontario of 53.53%.
The decrease for the second lowest tax bracket is designed to benefit those making between $45,283 and $90,000—the so-called “middle class”—while an individual or family making less than $45,283 won’t receive any benefit at all.
The decision to repeal income splitting also means the new changes will have an exaggerated effect on families with disparate income. A two-income family with one spouse earning $100,000 and the other earning $45,000, for example—will receive a possible maximum annual benefit of just $671 under the new tax regime resulting from the 1.5% tax rate reduction from 22% to 20.5%. Under the previous government, there was a different “family tax cut” benefit of up to $2,000 for married couples or common-law partners, but that was repealed under the Liberals.
• Inter vivos trusts will now be subject to the top personal tax rate of 33% for income in excess of $200,000.
•The refundable corporate tax on investment income in a Canadian Controlled Private Corporation (CCPC) increases to 10.67% from 6.67% while the dividend corporate refund and the Part IV tax rate—which is the tax on the taxable dividends received by a private or subject corporation—has been increased to 38.33% from 33.5%. The move is designed to lessen personal income tax deferral possibilities from CCPC investment income.
• Annual Tax-free Savings Account contribution limits have been rolled back to $5,500 (but will once again be indexed to inflation) after being raised to $10,000 (without indexing) by the previous Conservative government. The $10,000 TFSA limit for 2015 will remain intact. Total available TFSA contribution room to date is $41,000.
• Federal tax credits on charitable donations jump to 33% on gifts of more than $200 (from 29%) for individuals earning in excess of $200,000 in general.
The increase in tax rates for individuals earning more than $200,000 per year may seem problematic for wealthier business owners, but it’s important to understand that entrepreneurs who engage in smart tax planning have a number of tools available to help mitigate the risk of these changes—and maximize their after-tax wealth.
Depending on your financial circumstances, for example, accelerating some income, bonuses or even the disposal of capital or income properties into 2015 may allow you to lessen tax obligations in the coming tax year. The same strategy could be used for the income earned on inter vivos trusts.
Another option is to leave income in your corporation and take advantage of the long-term deferral benefits, or even push RRSP deduction claims into 2016 and subsequent tax years to help offset the new tax increase. A slightly more complex approach is to provide a prescribed rate loan to a lower-income spouse or family member, which can help shift income into the lower income-earner’s hands and potentially reduce your near-term tax liability.
Now that TFSA limits have been rolled back, maximizing RRSP contributions will probably be at or near the top of your list of personal financial priorities due to the saving vehicle’s sizeable tax-deferral advantage. (It’s also important to remember that the RRSP contribution deadline for the 2015 tax year is February 29, 2016, not March 1 due to the leap year). And as a result of the change to charitable donation tax credit rates, you may decide to postpone an upcoming donation—particularly if it’s significant in size—to 2016 in order to reap the benefit of the more generous donation credit.
As always, the very best approach is to consult with your tax advisor to develop a personalized strategy that suits your personal and corporate financial needs and priorities. Just remember that it almost never makes sense to allow tax liabilities to limit your ambitions. Some entrepreneurs might be tempted to cap their income—or even the growth of their businesses—to avoid paying more in tax, but that’s a reactionary strategy. Instead, be proactive, plan ahead and understand that you always have an array of tax-planning options at your disposal.
Armando Iannuzzi is a tax partner at Kestenberg Rabinowicz Partners LLP, a Markham, Ont.-based firm that provides strategic tax, accounting and finance services to entrepreneurs.
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What do you think of the new government’s tax changes? Will they affect you? Let us know by commenting below.