“The expected increase in personal tax rates is significant and warrants a review of tax planning strategies prior to January 1, 2016.”
The recent election of a Majority Liberal Government in Ottawa will likely result in changes to personal income tax changes rates. In particular, the Liberals promised to:
- Reduce the second lowest tax rate to 20.5% from 22%;
- Increase the tax rate on incomes over $200,000 to 33%, from 29%.
When these changes are implemented (we have assumed January 1, 2016) the top marginal tax rate in Ontario, for example, will increase from 49.53%, to 53.53%. We haven’t seen top marginal rates this high since 1994 and 1995 when the top marginal rate on regular income was 53.19%. In those years, dividends were subject to tax at 35.92% and capital gains at 39.89% (in Ontario). The table at the end of this tip illustrates the top marginal rates for 2015 and 2016 assuming the Liberal proposals become effective January 1, 2016 and that proposals regarding non-eligible dividends announced in the 2015 federal budget apply.
With the proposed tax increases, the top marginal rate on dividends (eligible or “non-eligible”) will be even higher, at 39.34% and 45.3% respectively, than the 1994 rate of 35.92%. The effective rate on capital gains of 26.76% will be lower than the 1994 rate of 39.89% but only because the capital gains inclusion factor is now 50% instead of 75%. If capital gains had only been 50% taxable in 1994, the comparative rates would have been 26.59%, just below the 2016 number.
The expected increase in personal tax rates is significant and warrants a review of tax planning strategies prior to January 1, 2016.
With a 4% increase in the regular top marginal rate (almost 8% in Alberta due to the combination of the Federal and Provincial changes) and increases in dividend rates of approximately 5% (over 10% on eligible dividends in Alberta), accelerating income inclusions may be warranted.
Some ways to accelerate income in 2015 include paying bonuses that would normally be accrued but not paid until after 2015. In addition, consider paying dividends (whether eligible or “ineligible”) in 2015 if the funds will be required in the next few years. If cash flow does not permit the payment of the actual cash dividends, the amount can be added to a shareholder loan account if appropriate documentation is prepared to confirm the declaration and payment of the dividends, as well as the requirement to credit the shareholder loan account. We recommend that promissory notes also be created for these types of payments.
Deferring discretionary deductions such as RRSP’s and loss carry forwards to future years when the top tax rate is higher may also be beneficial.
The expected increase in the top marginal tax rates in 2016 will affect taxpayers in all provinces and territories. Regular owner manager remuneration techniques will be less efficient than they used to be, after 2015. We recommend that you consider whether withdrawing funds in 2015, to prepay tax at a lower rate than 2016. In addition, deferring discretionary deductions where practical to 2016 or a subsequent year may be wise.
As with any tax planning , there is no rule of thumb. Deciding how best to withdraw corporate funds to pay personal expenses will largely depend on the facts. We would be happy to help you determine what is best in your situation.
| Ordinary Income | Capital Gains | Canadian Dividends Eligible | Canadian Dividends Non-Egilible | |||||
| 2015 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | 2016(1) | |
| Federal | 29.00% | 33.00% | 14.50% | 16.50% | 19.29% | 24.81% | 21.22% | 26.30% |
| Alberta | 40.25% | 48.00% | 20.13% | 24.00% | 21.02% | 31.71% | 30.84% | 40.40% |
| British Columbia | 45.80% | 47.70% | 22.90% | 23.85% | 28.68% | 31.30% | 37.99% | 40.61% |
| Manitoba | 46.40% | 50.40% | 23.20% | 25.20% | 32.26% | 37.78% | 40.77% | 45.69% |
| New Brunswick | 54.75% | 58.75% | 27.38% | 29.38% | 38.27% | 43.79% | 46.89% | 51.75% |
| Newfoundland and Labrador | 43.30% | 48.30% | 21.65% | 24.15% | 31.57% | 38.47% | 33.26% | 39.40% |
| Northwest Territories | 43.05% | 47.05% | 21.53% | 23.53% | 22.81% | 28.33% | 30.72% | 35.72% |
| Nova Scotia | 50.00% | 54.00% | 25.00% | 27.00% | 36.06% | 41.58% | 41.87% | 46.97% |
| Nunavut | 40.50% | 44.50% | 20.25% | 22.25% | 27.56% | 33.08% | 31.19% | 36.35% |
| Ontario | 49.53% | 53.53% | 24.76% | 26.76% | 33.82% | 39.34% | 40.13% | 45.30% |
| Prince Edward Island | 47.37% | 51.37% | 23.69% | 25.69% | 28.70% | 34.22% | 38.74% | 43.87% |
| Quebec | 49.97% | 53.31% | 24.98% | 26.65% | 35.22% | 39.83% | 39.78% | 43.84% |
| Saskatchewan | 44.00% | 48.00% | 22.00% | 24.00% | 24.81% | 30.33% | 34.91% | 40.06% |
| Yukon | 44.00% | 48.00% | 22.00% | 24.00% | 19.29% | 24.81% | 35.18% | 40.18% |
1 Assumes the increase to 2016 personal tax rates on non-eligible dividends announced in the 2015 federal budget will apply.
