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Liberal Tax Promises Just-In Time?


November 16th. 2015

On October 19, 2015 Justin Trudeau won the biggest fight of his career by beating Stephen Harper in the Federal election. This isn’t the first time he scored an impressive win over a Tory rival. In March of 2012 Mr. Trudeau, an underdog, bested Senator Brazeau in a charity boxing match. And just like in 2012, Mr. Trudeau proved that he shouldn’t be underestimated. His ‘fairness’ plan to cut middle-class taxes resonated with many voters, who elected him Canada’s new Prime Minister. Let’s take a look at some of his pre-election pledges.

 

Expected changes

The new Federal government is expected to create a new federal tax bracket on income in excess of $200,000. Such income will be subject to a 33% tax rate, which is a 4% increase from the current 29% rate. This will result in an effective top rate in Ontario of 53.5%. Concurrently, the 22% federal tax rate will be lowered to 20.5% for income in the $44,700 – $89,400 range. This decrease, if enacted, will save individuals a maximum of $671 annually.

 

Corporate tax rates are not expected to change significantly. The 2015 federal budget proposed a gradual decrease in corporate tax from 11% to 9%, for Canadian Controlled Private Corporations (CCPCs) that qualify for the small business deduction. The Liberal Party pledged to honour the proposed decrease in the small business tax rate to 9%, however the timing of this change remains uncertain.

 

The Liberal Party promised to reduce the annual TFSA contribution limit from $10,000 to $5,500.  The exact timing of this change is unknown, but it is believed that this reduction will take effect for the 2016 tax year.

 

Under the current rules an individual who exercises employee stock options may be entitled to a 50% stock option deduction. This effectively results in a capital gains tax treatment of a portion of employment income. The Liberal Party pledged to limit the stock option deduction. This pledge could expose the full stock option benefit to the top marginal tax rate of 33% after 2015.

 

Various personal tax credits may also undergo significant changes. The Family Tax Cut, which provides couples with dependent children under 18 years of age with a maximum benefit of $2,000, will likely be cancelled. Moreover, the three federal child benefit programs may be combined into one, which will be called The Canada Child Benefit. The pledged benefit starts at $6,400 per year, tax free, per child under the age of 6 and $5,400 per child from 6 to 17 years old. The benefit is income tested and is slowly phased out. A family earning $90,000, with 2 children will be entitled to a benefit of $5,875, tax free.

 

Potential tax strategies

One potential strategy to use in an escalating tax environment is to select when to receive income. The federal top marginal rate is expected to increase by 4% in 2016. Therefore, it may be beneficial to receive income in 2015 and save 4% of additional tax. For example, if you’re entitled to a bonus for 2015 which would be payable the following year, consider requesting the payment in 2015.  This way the payment would be subject to a lower tax rate. Also, consider realizing any capital gains on investments in 2015 in order to take advantage of the lower rate. On the other hand, capital losses should be realized in 2016. A similar strategy is recommended for employee stock options. It may be prudent to exercise the options in 2015 to take advantage of the stock option deduction, which may not be available in 2016.

 

Another way to alleviate the effect of rising tax rates is to shift discretionary deductions to 2016. For instance, an RRSP deduction taken by a taxpayer in the highest federal tax bracket is worth 29% in 2015, compared to 33% in 2016. Therefore, a taxpayer would benefit from potential 4% savings if an RRSP deduction is deferred to 2016.

 

The most obvious strategy is to simply accept the upcoming changes. Even if no alterations are made to the timing of income receipts or deductions, taxpayers should revise their budgets and personal spending expectations. Many families will be faced with lower after tax earnings, given the increased personal tax rates and elimination of Family Tax Cut credit.

 

Summary

Justin Trudeau’s plan will affect many Canadian families.  Taxpayers, who are in the highest tax bracket, will likely face increasing tax rates and elimination of certain tax credits. Given the changing tax landscape, now is a good time to discuss planning opportunities and review your circumstances with your accountant.


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