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What New Federal Tax Rates Mean for You

This article covers changes to personal income tax rates just confirmed in the December 4, 2016 throne speech.  We’ll compare the new federal tax rates for 2016 to those in 2015.  Our tax specialists also highlight several tax planning strategies that may save you money.

The Numbers:

Canada’s personal income tax rates will change as follows beginning in 2016:

  • If you earn approximately $45,000 to $90,000: Your federal tax rate will be reduced to 20.5%, from 22%;
  • If your income is over $200,000: Your federal tax rate on income over $200,000 will increase to 33%, from 29%.

When these changes are implemented (effective January 1, 2016) the top marginal tax rate in Ontario will increase from 49.53% to 53.53%.

The table below illustrates the top marginal personal income tax rates for 2015 and 2016 effective January 1, 2016.

Ordinary Income
Capital Gains
Canadian Dividends Eligible
Canadian Dividends Non-Eligible
2015 2016 2015 2016 2015 2016 2015 2016
Federal
29.00% 33.00% 14.50% 16.50% 19.29% 24.81% 21.22% 26.30%
Combined
49.53% 53.53% 24.76% 26.76% 33.82% 39.34% 40.13% 45.30%

 

Last Minute Tax Planning Measures:

With the increase in personal tax rates for all types of income, the following tax planning strategies might help.  Note:  The first three measures must be implemented in December 2015, but they can be completed without significant time or effort.

  • Consider receiving a dividend in 2015 rather than in a future year provided that the funds would otherwise be required in the short-term.  A tax savings of over 5% could be realized by implementing this strategy.
  • Accelerate an income inclusion by receiving a bonus that would normally be accrued but not paid to you until after 2015.  Generally, private companies will accrue a bonus at year-end and then pay that bonus within six months.  By accruing and paying the bonus to you before December 31, 2015, rather than deferring the payment to 2016, the rate of tax will be 4% lower in certain circumstances.
  • Review your personal investment portfolio for tax savings that may occur by realizing accrued gains on some securities that you may have otherwise sold some time in 2016.  By realizing those gains now instead of 2016, you could save yourself 2% tax.
  • Consider deferring certain discretionary deductions such as RRSP’s and loss carry forwards.  For example, an RRSP deduction that is deferred until 2016 would produce a 4% higher tax deduction for a taxpayer in the top marginal tax bracket.
  • Utilizing a family trust can also provide an opportunity to help split income within a family.

While this article provides general tax planning advice, it may not be the best advice for your situation. We strongly recommend that you meet with a Stern Cohen tax advisor for personalized advice that will provide you with the greatest benefit.