For many people, the end of 2015 couldn’t come fast enough. 2015 was a challenging and interesting year from a political, economic and social perspective. 2015 also saw one of the longest Canadian federal election campaigns in not-so-recent memory; a gruelling 11-week campaign that resulted in the election of a majority Liberal government, led by Justin Trudeau. The Liberals’ election platform promised a lot of tax changes if they were elected. On December 7, 2015, Bill Morneau, the new Federal Finance Minister, introduced a Notice of Ways and Means Motion to implement some of these changes.
The following is a list of the tax and estate planning changes that Canadian taxpayers need to know effective in 2016 and beyond and potential tax and estate planning solutions.
Key tax changes:
1. Change of Federal personal tax rates and tax brackets
The much discussed “middle class tax cut” was implemented with a decrease in the middle income tax bracket (income between $45,282 and $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. Reduction of the Tax-Free Savings Account (TFSA) annual contribution limit to $5,500
The TFSA annual contribution limit had been raised to $10,000 for 2015. For 2016, this amount has been reduced to $5,500 and will be indexed to inflation for subsequent years. The cumulative TFSA contribution limit from 2009 – 2016 is $46,500.
3. Changes to Federal Tax Rates for Private Corporations
To coincide with the proposed increased personal tax rates, and to preserve integration as between income earned by an individual and income earned in a corporation, Canadian controlled private corporations (CCPC) that earn investment income will see the tax rates rise on that income. 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. Proposed Changes to the Employee Stock Option Benefit Deduction
As part of the Liberal party campaign platform, there is a proposal to cap the amount that can be claimed as a deduction in connection with employee stock options. We expect more details will be announced in the next Federal Budget.
5. Family Income Splitting to be Cancelled
The Liberals have proposed to cancel the Family Tax Cut which was 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
Notwithstanding the proposed cancellation of the Family Tax Cut, income splitting is still possible with family members through the use of prescribed rate loans and family trusts.
2. Donate to Charities
In keeping with the increase in the top marginal personal tax rate, donations to charities are entitled to an enhanced donation tax credit of 33% on gifts in excess of $200 to the extent that the taxpayer has income that is subject to the new 33% tax rate. If an individual does not have income taxable at the 33% rate, then the tax credit for donations over $200 remains at 29%.
3. Tax Minimization Strategies for Business Owners
Self-employed business owners can income split with family members in a number of ways, such as paying family members a reasonable salary to the extent that they work in the business. Restructuring of the corporation may be required in order to include a spouse and adult children as shareholders. Income splitting can be achieved by paying dividends to such family members.
The Liberal Government has announced a number of other measures the full effect of which will be seen when it introduces its first Federal Budget in the spring. Proper tax and estate planning for owner-managers and high net worth individuals is more important than ever. Changes to the taxation of trusts and estates can also result in an unexpected tax bite. Contact the tax and estate planning group at DSF to arrange for a consultation.
This article was written by Sabina Mexis who is a tax lawyer and tax litigator with 15 years’ experience, specializing in tax and business succession structuring and planning at Devry Smith Frank LLP.