November 17, 2015
As most of you will be aware, the newly elected Liberals under the leadership of Justin Trudeau campaigned on a platform of increasing tax rates to the rich and lowering tax rates to the middle class. What does this really mean to you as taxpayers? This article will examine the impact of the proposed changes on Canadian taxpayers of varying income levels.
1. Tax rate cut of 1.5% to the Middle Tax Bracket:
The federal tax rate on income earned between $44,702 and $89,401 will be reduced from 22% to 20.5%. This will be a reduction applicable to every Canadian taxpayer earning in excess of $44,702 annually as our tax system is based on marginal tax brackets. An individual who earns $100,000 per year will be taxed at 20.5% on income between $44,702 and $89,401, and income in excess of $89,401 will be taxed at a higher rate. The maximum savings per individual is $670. Please note, only the middle bracket and the new high bracket described below are impacted by the proposed changes. The tax rates at all other brackets are to remain the same.
Tom and Dana are a two-income family: Tom earns a salary of $50,000 annually and Dana earns a salary of $100,000 annually. In Nova Scotia, prior to the proposed tax changes, Tom would have paid combined federal and NS tax on his income of $11,079 and Dana would have paid tax of $30,738 for a total tax bill for the family of $41,817. Once the tax reduction is enacted, Tom’s tax liability will be reduced by $80 to $10,999 and Dana’s by $670 to $30,068 for a total tax bill for the family of $41,067. The Liberals’ middle class tax reduction will save the family $750 annually.
2. Creation of a new High Tax Bracket of 33%:
Individuals who earn in excess of $138,587 currently pay federal tax at a rate of 29% and combined federal and NS tax at a rate of 46.5%. As well, Nova Scotia has a combined tax rate of 50% for those individuals earning in excess of $150,000 per year. The Liberal platform promised to increase taxes paid by “rich” Canadians. Therefore the federal tax rate will increase to 33% for income earned in excess of $200,000, which produces a combined federal and Nova Scotia tax rate of 54% on that income. Please note, only the middle bracket and the new high bracket are impacted by the proposed changes. The tax rates at all other brackets are to remain the same.
John and Susan are a single earner family. John earns a salary of $400,000 per year and Susan is a stay-at-home parent to one child under 18. Prior to the proposed changes, John would have paid total tax for 2015 of $173,047. Following the changes, John’s total tax bill for the year would be approximately $182,399, for an overall increase of $9,352.
3. Cancellation of Family Tax Cut:
The Liberal platform indicates they intend to cancel the Family Tax Cut, which was introduced by the Conservatives effective for the 2014 taxation year. The Family Tax Cut allowed families with children under 18 to effectively split income in that the spouse in a higher tax bracket could claim a credit designed to have up to $50,000 of his income taxed at his spouse’s marginal tax bracket. The maximum savings per family was $2,000. Although the Family Tax Cut was available to all Canadians who had kids in the household under 18, the Liberals felt it predominantly benefited wealthy families more and that families with no children received no benefit at all, and thus its proposed cancellation. The Liberal platform specifically states that the proposed cancellation of income splitting will not affect pension income splitting, which has been in place for many years and benefits a huge number of seniors at all income levels.
Tax Planning Strategies for High Income Nova Scotians:
Presumably these changes will be effective for the 2016 tax year. Therefore, it may make sense for certain high-earning taxpayers to have income taxed in the 2015 year rather than in the 2016 year where there is flexibility. For example, if an individual who is a shareholder of a private corporation intends to take a large dividend from the corporation and his overall taxable income will exceed $200,000 in both 2015 and 2016, it would be to his benefit by 4% of the dividend amount to accelerate the payment of the dividend into 2015 vs. waiting until 2016. Obviously the time value of money will have to be factored in to the decision as well as the tax will be paid a year earlier than if the dividend was received in 2016.
If possible, tax deductions such as RRSP contributions should be claimed by higher income tax payers in 2016 rather than 2015 as their tax savings on these items would be 54% vs. 50%.
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