The government has introduced a motion in Parliament to proceed with certain proposed income-tax changes. They have stated that the changes will take effect in 2016.
The income-tax rate on Canadians earning between $45,282 and $90,563 will be reduced from 22% to 20.5%.
A higher tax rate of 33% will be imposed on those earning more than $200,000 per year. The current Federal tax rate is 29%.
The increase in the limit for the tax-free savings accounts to $10,000 will be cancelled and hence the contribution limit for 2016 will be $5,500.
In addition to the above changes which have been highly publicized, there are also changes to the taxation of investment income of private corporations including Canadian-controlled private corporations. The intention of these changes is to prevent creating an additional tax deferral advantage by earning investment income through a corporation. The changes are as follows:
- An additional 4% refundable tax is imposed on investment income meaning the rate changes from the current refundable rate of 26.67% to 30.67%. The overall Federal tax rate on investment income before any dividend refund is therefore 38.67% where it was previously 34.67% (both figures plus Provincial tax).
- There is an additional 5% refundable tax on portfolio dividends meaning a changes from the current refundable rate of 33.33% to 38.33%. Portfolio dividends are not subject to any other corporate tax so 38.33% becomes the Federal and overall corporate tax rate on portfolio dividends before the dividend refund.
- There is an increase in the rate at which dividend refunds are paid out of a private corporation’s refundable dividend tax on hand from 33.33% to 38.33%. So for every $300 paid out as a dividend, $115 will be refunded to the company paying the taxable dividend rather than the current $100 to the extent the company has a balance of refundable dividend tax on hand.
The change to the tax rates on investment income will also apply beginning in 2016 and will be prorated if the fiscal year end of the company straddles December 31, except that the increase of 5% on portfolio dividends will apply to dividends received in 2016.
As a result of the personal tax rate changes, there is a possibility of paying personal tax on income earned through a corporation in 2015 (or prior) at 2016 and beyond rates by paying the net income of a company after corporate tax to the shareholder(s) in 2016 (or after). Put another way there may be a tax benefit to paying out dividends to the shareholders in 2015 rather than waiting until 2016 where the taxable income of the individual receiving the dividend has taxable income greater than $200,000.
The overall impact of the changes to the refundable dividend tax are zero to the extent that all of the increase can be recovered in the future, but there may be a true tax cost where all refundable tax cannot be recovered. Companies earning investment income will have to pay more up front to the extent that all refundable tax is not recovered in the year paid.
To discuss how these changes might impact your unique circumstances please contact us.