Tax brackets have changed…but there’s more

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:

• split income (Kiddie Tax);
• charitable donations; and
• inter vivos and testamentary trusts.

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.