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SUCCESSion: Tax & Estate Matters

Dec 9, 2015

The Other Shoe has Dropped – Federal Government Confirms Income Tax Changes Effective 2016

As widely expected, the new Liberal government has confirmed that they will be enacting various income tax changes, which were originally promised as part of their election campaign platform. These changes will be effective as of January 1, 2016.

Personal Tax Rates

There have been significant changes to the income tax rates for individuals. The federal government has lowered the income tax rate for the second lowest bracket, being income between approximately $44,300 and $90,500, from 22% to 20.5%.

At the same time, a new marginal rate has been created for income above $200,000. The rate for such income will increase from 29% to 33%, which means that, in Ontario, the new top combined marginal rate on ordinary income will be 53.53%.

As a result of these changes, the highest combined marginal rate for an Ontario resident on a capital gain will be 26.76%.

This 33% rate will also apply to trusts going forward, both inter vivos trusts and (with certain exceptions) testamentary trusts. The federal donation tax credit will be increased to reflect this new taxation level.

Dividends Received by Individuals

As a result of the announced changes, the tax rate payable on dividends received by individuals will also be affected. For eligible dividends, the top combined rate for Ontario residents will now be 39.34%, and for non-eligible dividends, the top rate in Ontario will rise to 45.30%.

Tax-Free Savings Accounts (TFSAs)

The government, as promised, has reduced the yearly contribution amount from $10,000 back to $5,500. Unlike the previous contribution limit, it will again be indexed to inflation. The unused carryforward amounts from previous years, include the 2015 limit of $10,000, will not be reduced. As such, for someone who has never before contributed to a TFSA, such individual will have a contribution limit of $41,000 by the end of 2015.

Income Splitting

The federal government has announced that income splitting between spouses with minor children, which was introduced by the Conservative government and started for the 2014 taxation year, has been cancelled, again effective for the 2016 taxation year.

Corporate Tax

Passive income earned in a Canadian-controlled private corporation (CCPC) will now be taxed at an additional 4%, as the surtax will be increased from 6⅔% to 10⅔%. This amount is a 'refundable' tax to the CCPC and the calculation of the 'refundable dividend tax on hand' account for CCPCs will be adjusted to reflect this tax increase.

The dividend refund rate (i.e. the amount a CCPC is refunded once it pays taxable dividends) will be increased from 33⅓% to 38⅓% on dividends paid starting in 2016.

The Part IV tax rate payable on certain dividends received by private corporations will also increase from 33⅓% to 38⅓%.

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