With December 31st fast approaching, here’s our updated, annual look at some year-end tax tips you may wish to keep in mind as we enter the final weeks of 2013.
1. Consider taking dividends in 2013, where possible
A corporation may distribute its after-tax income as dividends to shareholders, who then pay tax on the dividend income. An individual who receives dividends from a Canadian corporation may claim a dividend tax credit (DTC) that is meant to compensate for tax that was paid by the corporation. Two common types of dividends that an individual may receive from a Canadian corporation are eligible dividends and non-eligible dividends. Eligible dividends are paid from income that was taxed at high rates in a corporation, so these dividends are eligible for an enhanced DTC in an individual’s hands. Non-eligible dividends are paid from income that was taxed at low rates in a corporation, so a lower DTC is available to individuals for these dividends. Canadian dividends received by an individual are first “grossed-up” (increased) to determine taxable income and then a DTC is allowed to reduce taxes payable.
Starting in 2014, the federal government will be changing the personal tax calculation for non-eligible dividends. As a result of changes to the gross-up rate and DTC rate on non-eligible dividends, the marginal tax rates on these dividends will be going up in 2014.
The top combined federal/provincial marginal tax rates for non-eligible dividends are expected to increase between 1.0 and 4.3 percentage points in 2014, depending on the province, as shown in Figure 1.
Figure 1 – Combined Federal/Provincial Top Marginal Tax Rates on Non-eligible Dividends in 2013 and 2014
|Province||2013||2014||Increase in 2014|
|Newfoundland and Labrador||30.0%||31.0%||1.0%|
|Prince Edward Island||38.6%||40.0%||1.4%|
(Tax rates in this report reflect combined federal and provincial marginal tax rates, including surtaxes where applicable, based on known rates as at November 8, 2013.)
This change can be particularly significant for business owners who are contemplating whether to distribute dividends from their corporations in 2013 or 2014. Income that can be distributed as non-eligible dividends (after paying corporate tax) includes business income that is subject to the small business deduction limit ($500,000 federally and in most provinces), interest income and the taxable portion of capital gains. If you pay tax at the top marginal rate and can receive $10,000 of non-eligible dividends in 2013, rather than 2014, you’ll save between $100 and $430 of tax, depending on the province.
Ontario has announced that it will parallel the federal changes for non-eligible dividends in 2014. In addition, theOntario Economic Outlook and Fiscal Review 2013 contained proposals that would change the method for calculating the DTC in Ontario. Ontario levies a surtax when provincial income tax exceeds $4,289 in 2013, which occurs with taxable income of at least $69,959. For 2013, the Ontario surtax is calculated after deducting the DTC, such that the surtax effectively increases the amount of the DTC for taxpayers with higher incomes. Starting in 2014, the government has proposed that the Ontario surtax will be calculated before deducting the DTC, with consistent DTC rates being applied for all individual taxpayers.
Figure 2 – Combined Federal/Ontario Top Marginal Tax Rates on Dividends in 2013 and 2014
|Income from $135,054
|Income over $509,000|
(For individuals with taxable income exceeding $509,000 in 2013, Ontario has a Deficit-Fighting High-Income Tax Bracket that increases the marginal tax rates. The marginal tax rates include the effect of proposals in the Ontario Economic Outlook and Fiscal Review 2013.)
If you are an Ontario resident with taxable income exceeding $135,000, tax rates for eligible dividends will be virtually consistent in 2013 and 2014; however, tax rates for non-eligible dividends are expected to increase by almost four percentage points in 2014. You should consider receiving non-eligible dividends in 2013, rather than 2014, where possible.
2. Plan for upcoming personal tax rate increases in British Columbia and New Brunswick
When tax rates are expected to rise in the future, it may make sense to take advantage of existing lower rates before the increase takes effect. In both British Columbia and New Brunswick, tax rates are slated to rise in 2014 for certain individuals.
In these provinces, affected individuals may wish to realize income in 2013 by taking steps such as selling investments with a capital gain, exercising stock options or taking bonuses, where feasible, in 2013 rather than 2014.
It may also make sense to defer deductible expenses until 2014 where possible. For example, you could claim a deduction for your 2013 RRSP contribution in 2014. By accelerating income and delaying deductions, you could save up to $427 of tax for each $10,000 of income that is accelerated or deductions that are deferred.
For 2014 and 2015, the provincial tax rate that applies to personal taxable income exceeding $150,000 in B.C. will increase temporarily from 14.7% to 16.8%. The top effective combined federal/B.C. marginal tax rates applicable to investment income for 2013 and 2014 are shown in Figure 3.
Figure 3 – Combined Federal/B.C. Top Marginal Tax Rates on Investment Income in 2013 and 2014
As of July 1, 2013, New Brunswick personal tax rates were returned to higher 2006 levels, as shown in Figure 4.
Figure 4 – New Brunswick Marginal Tax Rates in 2013
|Taxable Income||Before July 1, 2013||Starting July 1, 2013|
|Up to $38,954||9.10%||9.68%|
|$126,662 and over||14.30%||17.84%|
The top effective combined federal/New Brunswick marginal tax rates applicable to investment income for 2013 and 2014 are shown in Figure 5.
Figure 5 – Combined Federal/New Brunswick Top Marginal Tax Rates on Investment Income in 2013 and 2014