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Liberal Government Tax Changes for 2016


December 8th. 2015

The Federal government has tabled a Notice of Ways and Means, with proposed changes to the Income Tax Act, to take effect January 1, 2016.  They have certainly wasted no time in implementing these aspects of their election platform.

 

The highlights of the changes are as follows:

 

Indexing of tax brackets and adjustment of tax rates – marginal tax brackets are adjusted so that the following (Federal) tax rates apply:

 

0-$45,282                          15%

$45,282-$90,563               20.5% (down from 22%)

$90,563-$140,388             26%

$140,388-$200,000           29%

Over $200,000                  33%

 

This will result in some tax savings for individuals with taxable income between $45,000 and $90,000.  For those with taxable income over $220,000, the effective marginal tax rate in Ontario will be 53.53%.

 

Adjustments to Charitable Donation Credits

 

Charitable donations have long been eligible for a non-refundable tax credit, calculated at the top marginal rate regardless of the actual tax rate applicable to the donor.  In Ontario, with the introduction of higher marginal tax rates for income over $150,000, the charitable donation credit is still calculated at the rate applicable to income below $150,000, resulting in some “loss” of tax benefit for high income donors.  The Federal government has made provision for this situation, and donations made in 2016 (and future) will be eligible for credit at the new 33% rate, to the extent the donor’s taxable income exceeds the threshold for the 33% tax rate.  Note that donations carried forward from 2015 or earlier years will not be eligible for this increased credit.

 

Kiddie Tax

 

The Kiddie Tax rates have been adjusted to 33%.  This tax rate therefore applies to all income earned by a minor child from private company dividends, and certain business income earned through a trust or partnership by a minor.

 

There is still room for some tax savings by splitting income with minor children, since a substantial amount of dividend income can be earned before the Ontario sur-taxes apply, resulting in a tax rate differential of up to 7% on this income.

 

Corporate Investment Income

 

In order to reduce the incentive to earn investment income through a holding company, private companies are subject to a “refundable tax” on investment income (often referred to as RDTOH).  This tax is recovered by the corporation when dividends are paid.

 

The refundable tax is increased from 6 2/3% to 10 2/3%, effective January 1, 2016.  The refund mechanism is also adjusted so that the tax recovery is equal to 38 1/3% of dividends paid (up from 1/3).  Both adjustments will be pro-rated for years that straddle December 31, 2015.

 

This change provides something of an opportunity, since a corporation with an accumulated RDTOH balance based on previous tax rates, will be able to recover this tax through the payment of a smaller dividend after 2015.

 

Tax Free Savings Accounts (TFSA)

 

As expected, the TFSA contribution limit for 2016 will be $5,500.  Thankfully, the government has retained the $10,000 limit for 2015.  As a result, regardless of whether or not you made a $10,000 TFSA contribution in 2015, that contribution room will be retained.

 

Contribution limits will be indexed to inflation, in $500 increments.

 

No further changes of note have been included in this Notice of Ways and Means.

 

Stock Options

 

This legislation does not deal with the proposed changes to stock option taxation.  However, a previous announcement made it clear that the proposed changes will apply only to options granted after 2015.


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