Happy New Year! For many people, the end of 2015 couldn’t come fast enough. Last year was a challenging and interesting one—on political, economic and social fronts. The year 2015 also saw the longest federal election campaign in Canada’s history: a gruelling 11-week battle that resulted in the election of a majority Liberal government, led by Justin Trudeau. The Liberal’s election platform promised many tax changes, and on December 7, 2015, new federal Finance Minister Bill Morneau introduced a Notice of Ways and Means Motion to implement some of them.
Below, I list the tax and estate planning changes that Canadian taxpayers need to know that will be effective in 2016 and beyond, as well as the potential solutions in addressing these changes.
KEY TAX CHANGES
1. Federal personal tax rates and tax brackets
The liberals implemented the much-discussed “middle-class tax cut”—decreasing the middle income tax bracket ($45,282 – $90,563) from 22% to 20.5%. This tax cut is accompanied by an increase in the tax rate on Canadians earning more than $200,000 from 29% to 33%. These changes are effective January 1, 2016.
2. Tax-Free Savings Account (TFSA) annual contribution limit
Last year’s raise of the TFSA annual contribution limit (to $10,000) has been reduced by the Liberals to $5,500 for 2016, and it will be indexed to inflation for subsequent years. The cumulative TFSA contribution limit from 2009 to 2016 is $46,500.
3. Federal tax rates for private corporations
Canadian-controlled private corporations (CCPC) that earn investment income will see the tax rates rise on that income. This coincides with the proposed increased personal tax rates and preserves integration between income earned by an individual and income earned in a corporation. In Ontario, interest income earned in a CCPC will be subject to tax at the highest combined federal and provincial tax rate of 50.17%.
4. The employee stock option benefit deduction
The Liberal election platform proposed capping the amount that can be claimed as a deduction in connection with employee stock options. We expect that more details will be announced on this issue in the next federal budget.
5. Family income splitting
The Liberals have proposed canceling the Family Tax Cut introduced by the Conservative government in October 2014. More details will likely be announced in the next federal budget.
1. Prescribed rate loans for income splitting with family members
Despite the proposed cancellation of the Family Tax Cut, income splitting is still possible among family members through the use of prescribed rate loans and family trusts.
2. Charity donations
In keeping with the increase in the top marginal personal tax rate, those taxpayers whose income is subject to the new 33% tax rate are entitled to an enhanced donation tax credit of 33% on gifts in excess of $200. For those who don’t have income taxable at the 33% rate, though, the tax credit for donations over $200 remains at 29%.
3. Strategies to minimize taxes for business owners
Self-employed business owners can income split with family members in a number of ways: for example, by paying family members who work in the business a reasonable salary. Income splitting can also be achieved by paying dividends to family members, although corporations may have to do some restructuring in order to include spouses and adult children as shareholders.
The Liberal government has announced a number of other measures whose full effect won’t be seen until the federal budget is announced in the spring. Changes to the taxation of trusts and estates, for example, may result in an unexpected tax bite. Proper tax and estate planning for owner-managers and high net worth individuals is more important than ever. Contact the tax and estate planning group at DSF to arrange for a consultation.