After recalling Parliament in the first week of December, the new government acted quickly on its key tax promises. Some introduced measures were already known from the Liberal platform, some only became clear in the announcement and still more were consequent on those other changes.
This summary draws from the published Explanatory Notes that accompanied the Notice of Ways and Means Motion to amend the Income Tax Act (Canada).
Rates for taxation years after 2015
The so-called “middle class tax cut” will be effective for the 2016 tax year. This is a reduction in the rate applying to income in the second tier, from 22% to 20.5%. Concurrently, a new top 33% tax-rate bracket is added. For 2016, the federal brackets are as follows (to be indexed in subsequent years):
• Up to $45,282 15%
• Up to $90,563 20.5%
• Up to $140,388 26%
• Up to $200,000 29%
• Over $200,000 33%
Tax-free savings accounts
There had been some uncertainty as to what the “rollback” of the $10,000 tax-free savings account (TFSA) room might mean. As it turns out, that amount will stand as the TFSA dollar limit for 2015 alone, whether or not contributions were made during 2015. That is, it will carry forward for those who had not used it in the year.
The TFSA dollar limit for 2016 will be $5,500, and the indexing formula is reinstated. The reinstated calculation refers back to the $5,000 amount in the 2009 base year, with the calculation rolling forward from then. It effectively disregards the $10,000 amount in 2015; or put another way, contributors are not penalized in future years for having been granted a large amount of TFSA limit in 2015.
Unlike registered retirement savings plan room that changes annually, the TFSA limit is indexed periodically. It is, however, based on an underlying reference figure that is indexed annually. Once that reference figure rounds up to the next $500 increment, the limit is increased that year and following. It increased to $5,500 in 2013.
Deduction by individuals for gifts
The introduction of the new 33% bracket for income in excess of $200,000 has implications for the tax credit for charitable donations. Currently, the credit is worth 15% on the first $200 of annual donations and 29% on amounts over $200. Respectively, those were the prevailing lowest and highest bracket rates.
The addition of the 33% bracket would have automatically increased the over-$200 credit rate from 29% to 33%. As the credit rate applies irrespective of the income of the donor/taxpayer, this would have made an already generous benefit even more so.
Instead, from 2016 on, the higher 33% credit rate will be available only to the extent that a taxpayer has income over $200,000. This assures that high-income taxpayers will not be deterred from donating, while preserving the value of the credit for others. To illustrate how this will work, suppose a person with taxable income of $215,000 donated $20,000. Only $15,000 would be entitled to the 33% credit rate, with $4,800 at 29% and $200 at 15%.
Corporate-personal tax integration
The proper functioning of our tax system is based in part on the integration of personal and corporate taxes. Absent such a coordinated approach, the use of a private corporation could lead to unintended tax benefits. Integration is carried out using a number of mechanisms at the corporate level and on passing income from a corporation to an individual. The underlying theory is to impose a tax cost that roughly emulates the corporation as a top-bracket personal taxpayer.
The increase in the top personal tax rate from 29% to 33% necessitates adjustments to the rates used in these integration mechanisms. For a private corporation (including a Canadian-controlled private corporation), this includes a 4% increase to the refundable tax on investment income and a 5% increase to the refundable tax on portfolio dividends.
The changes are technical in nature and of limited value without a detailed review in context. Shareholders of private corporations should discuss these issues with a tax professional, as this could affect dividend/salary decisions and investment policies at the corporate level.
Date for the 2016 Federal Budget?
Parliament last sat on December 11, and it was adjourned until January 25, 2016.
As a final order of business before the adjournment, a motion was brought (and passed) setting forth the membership of the Standing Committee on Finance and authorizing it to commence its pre-budget consultations. The committee’s report will be due back to the House of Commons no later than February 5, 2016.
With the expectation that the government will take time to review the report, we should not expect an announcement of the tabling of the budget until the second week of February at the earliest. The Federal Budget is most often tabled in March, prior to the beginning of the government’s fiscal year on April 1st.