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As expected, the federal government’s December 7 Notice of Ways and Means Motion introduced changes to personal income tax rates affecting middle- and high-income earners.

It’s widely known that the federal tax rate on taxable income between $45,282 and $90,563 will drop from 22% to 20.5% beginning January 1, 2016. And, there’s a new tax rate of 33% on income greater than $200,000, a four percentage point increase over the previous 29%.

Read: TFSA back to $5,500 as of Jan. 1. Here’s what to do

But the motion also introduced several unexpected changes for small business owners.

The context

The government strives to ensure that a taxpayer pays the same amount of income tax regardless of whether the income is earned directly by the individual (i.e., investment income) or indirectly through a corporation (i.e., corporation earning investment income and paying dividends to a shareholder). So when tax rates change, the Canadian government evaluates the impact and addresses potential gaps. As such, the new 33% top personal rate means the government must change provisions that affect Canadian controlled private corporations (CCPCs).

  • A CCPC’s additional refundable tax will increase from 6.67% to 10.67%. The Department of Finance has indicated the increase is intended to “reduce personal income tax deferral possibilities that individuals earning income directly might otherwise obtain by earning such income through a CCPC.”
  • Part IV tax levied on dividends received by a private corporation is increasing from 33.33% to 38.33%.
  • Similarly, the refund of refundable taxes will increase from 33.33% to 38.33%.

For a discussion of how these tax elements interact, read Help corporations save taxes through RDTOH account.

Upcoming articles in Advisor’s Edge Report will discuss other impacts of the 33% personal tax bracket on other provisions, including:

Stay tuned!

by James W. Kraft, CPA, CA, MTax, CFP, TEP, and Deborah Kraft, MTax, LLM, TEP, CFP. Deborah is faculty and director, Master of Taxation Program, School of Accounting & Finance, University of Waterloo. James is vice-president, Head of Business Advisory & Succession, BMO Nesbitt Burns.

Originally published on Advisor.ca

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