Blog: What you need to know for 2016: Tax changes for the New Year

February 22nd, 2016 tax changes

(Originally published in Tax Talk for Health Professionals, February 2016)

Now that a new tax year is upon us, there are important tax changes to consider. This article will summarize the significant personal and corporate tax changes that will affect taxpayers in the 2016 taxation year.

Reduction in the small business corporate income tax rate

Canadian-controlled private corporations (CCPCs) are entitled to claim a small business deduction on active business income. In 2015, the small business deduction provided a tax rate in Ontario of 15.5 per cent on the first $500,000 of a CCPC’s active business income. The federal tax rate will decrease by 0.5 per cent a year for four years beginning in 2016, reducing the small business income tax rate in Ontario to 15.0 per cent in 2016, 14.5 per cent in 2017, 14.0 per cent in 2018, and 13.5 per cent in 2019.

Increase in the top personal federal tax rate

Effective Jan. 1, 2016, the government will tax Canada’s highest income earners at a new top federal tax bracket. Individuals with income over $200,000 will be subject to a federal tax rate of 33 per cent. Last year, the top federal tax rate was 29 per cent, and applied once taxable income hit $138,586. The 29 per cent federal tax rate will now become the second highest tax bracket, and will apply to taxable income between $140,388 and $200,000. This four per cent increase in the highest federal bracket will bring the combined top marginal tax rate in Ontario to 53.53 per cent, up from 49.53 per cent in 2015.

Combined Top Marginal Personal Tax Rates for Ontario Taxpayers

2016 vs. 2015

SalaryCapital GainsEligible DividendsNon-eligible Dividends
201653.53%26.76%39.34%45.30%
201549.53%24.76%33.82%40.13%

Increase in the personal non-eligible dividend tax rate

The Canadian tax system contains integration rules that aim to eliminate any tax preferences for earning income in a corporation versus personally. The objective of integration is to ensure that an individual will be in the same tax position if they earn income first in a corporation and then distribute the after-corporate tax amount to an individual by way of a dividend versus earning income personally by way of a salary or self-employment income.

To coincide with the decline in the small business corporate tax rate over the next four years, and to maintain the objective of integration inherent in setting Canadian income tax rates, there will be a gradual increase in the federal personal income tax rate on non-eligible dividends beginning in 2016. Non-eligible dividends are taxable dividends that are paid out of corporate income that has been taxed at the small business rate.

On income first taxed in a corporation at the small-business rate and then paid out as a dividend to an individual, there are no longer tax savings when compared to earning that income personally via a salary or self-employment income. For income not taxed at the small-business rate in a corporation and then paid out as a dividend to an individual, there is a tax cost of two per cent. In both cases, virtually perfect integration.

Change in donation tax credit rate for high-income earners

Prior to 2016, the maximum combined federal and Ontario donation tax credit available was 46.41 per cent, and the highest marginal tax rate was 49.53 per cent. In other words, for every $1.00 that a high-income earner donated s/he would be taxed at $0.50 but earn a donation tax credit of only $0.46.

The increase to the highest federal personal income tax rate for 2016 may have created a larger disincentive for high-income earners to make charitable donations. To remedy this potential imbalance, a higher donation credit was introduced for individuals who are in the new highest federal income tax bracket. To the extent that an individual has income greater than $200,000, any donations made in excess of $200 will be entitled to a donation tax credit of 50.41 per cent. Given that an individual could still be taxed at a personal tax rate of 53.53 per cent, there is still a mismatch between the income earned and the donation tax credits.

Planning note: It is more tax efficient to make charitable donations through one’s professional corporation than personally.

Other significant changes include:

  • An increase in the corporate tax rate on interest income earned by a CCPC to 50.17 per cent (2015: 46.17 per cent);
  • An increase in the corporate tax rate on capital gains earned by a CCPC to 25.09 per cent (2015: 23.09 per cent);
  • An increase in the corporate tax rate on Canadian dividend income earned by a CCPC from non-connected corporations to 38.33 per cent (2015: 33.33 per cent);
  • A rollback of the annual contribution limit to a Tax-Free Savings Account to $5,500 (2015: $10,000);
  • A decrease to the personal income tax rate to 20.5 per cent (2015: 22 per cent) on income between $45,282 and $90,563;
  • The loss of graduated income tax rates for testamentary trusts that have been in existence for longer than 36 months.

(This article was originally published in Tax Talk for Health Professionals, February 2016.)

Tax Talk for Health Professionals is prepared for the general information of our clients and other friends of Crowe Soberman. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.

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